Risk in the FX Market

The average volume in FX markets is around US$2 trillion, which poses ..... challenge to developing and maintaining robust cross border currency settlement process; a robust cross-currency settlement process is therefore a need of the day.

The Group of 10 (G-10) have identified issues in the riskless settlement of cross-border and multi-currency FX transactions, and thanks to their efforts, efficient settlement systems have since evolved that today try to address specific FX risks by incorporating risk ..... processes.

These provide a ..... level to the participants in global FX markets, according to K. Shivram and G. Ramaswamy of Cognizant Technology Solutions.

FX trading and settlement poses many forms of risk, but it is the settlement risk that most needs to be addressed: the dollars involved in settlement risk are huge, a large bank having almost three times the ..... to settlement risk that it has to credit risk.

FX settlement risk clearly has a credit risk .....: whenever a party cannot make its payment of the currency it sold conditional upon its final receipt of the currency it bought, it faces the possibility of losing the full principal value involved in the transaction.

FX settlement risk also includes a liquidity risk: if a party does not receive the currency it purchased when it is due, it would need to cover and finance this shortfall until its counterparty ..... its obligation.

The FX market is also unique in comparison to other financial markets in ..... it is a 24-hour market.

The final settlement of a currency is ..... in the financial centre of that currency's home country; for instance the final settlement of the US dollars happens in New York as the final settlement of pounds sterling happens in London.

Differing time zones, market open and close timings, and settlement deadlines in various geographies ..... another risk called the Herstatt risk.

Due to time zone differences, several hours can ..... between a payment being made in one currency and the offsetting payment being made in another currency, and between these times, a counterparty may have paid in funds, before it receives funds the counterparty defaults.