Risk Management
The employment of financial analysis and trading techniques, such as attaching stops and limits, to reduce and control exposure to various types of risk.
Related terms
Risk
The exposure to potential losses taken on when trading a security. Different assets carry different levels of risk, letting you tailor strategy to your experience and appetite.
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An order to buy or sell once a currency or security reaches a specified price, designed to limit a trader’s loss on a position. The trade is processed only if the chosen rate is reached, capping downside without the need to monitor the market constantly.
Read full definitionHedging
Taking an offsetting position to reduce the impact of currency or price movements on a business. The aim is to protect margins and make cash flows more predictable, not to speculate.
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Forward Points
The amount added to or subtracted from the spot rate to price a forward contract. They reflect the interest-rate difference between the two currencies over the contract period.
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A hedging strategy that combines buying a protective option and selling another to offset the cost. It caps downside risk within a defined range while keeping some upside, often at little or no premium.
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Reducing currency risk by matching revenues and costs in the same currency, so gains and losses offset without a financial instrument, for example, paying suppliers in the currency you also earn.
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The degree to which a business’s financial results are affected by exchange-rate movements. It arises from foreign-currency sales, purchases, assets, liabilities or forecast cash flows.
Read full definitionMark-to-Market
Revaluing an open position at the current market rate to show its present gain or loss. Hedges are marked to market so a business can see the live value of its contracts.
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A request for additional funds when an open hedging position moves against you and its mark-to-market loss exceeds the collateral already posted. It restores the required security buffer.
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