Foreign exchange market is where participants buy, sell, exchange and speculate currencies. Forex market is short for foreign exchange market. Organizations including banks, commercial companies, central banks, investment management firms, hedge funds, investors, and retail forex brokers work in the forex market. Participants earn the net profit by buying low-valued currencies and selling high-valued ones. Foreign exchange trades contain lots of risks. We will list some problems traders can meet in the forex market.
Leverage just needs a small investment at the beginning to access to substantial trades in foreign currencies. This small investment is called the margin. Investors may pay more margin if the value of currencies fluctuates. Due to volatile market conditions, leverage can cause a big loss in initial investment.
2. Interest Rate
Interest rate can have an impact on the exchange rate. If a country’s interest rate goes up, the value of its currency becomes stronger. It brings more returns to the country. On the other hand, when the interest rate drops, the value of the currency will reduce. You should remember that interest rate and its circuitous effect can result in changes in currency value.
The counterparty in a financial transaction is a company that supplies the asset to investors. “Counterparty risk refers to the risk of default from the dealer or broker in a particular transaction. In forex trades, spot and forward contracts on currencies are not guaranteed by an exchange or clearing house. In spot currency trading, the counterparty risk comes from the solvency of the market maker. During volatile market conditions, the counterparty may be unable or refuse to adhere to contracts.” Investopedia indicated.
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