Risk involved in Foreign Currency transactions

 Forex is highly volatile market which involve lot of risk during transactions. We are summarized here in brief

1. Operational Risk:- It occurs due to human error, technical faults, system failure and infrastructure breakdown
2. Exchange Risk:- Occurs due to fluctuation of exchange rates in different time zones
3. Liquidity Risk:- Occurs due to mismatch in maturity pattern of assets and liabilities 
4. Market Risk:- Occurs due to adverse movement of market parameters or when players are unable to exit quickly
5. System Risk:- Risk in whole banking industry
6. Country Risk:-  Occurs when counter-party is available in different country willing to perform his part work as per contract but unable to perform due to local government regulations.
7. GAP/Interest Rate Risk- Banks buy and sell in spot and forward rates but sometime deals stuck before maturity or on maturity and ever after maturity. To compete this problem, bank creates a hedge to invest or make another contract with third party due to this contract , a GAP has created in Assets and Liabilities which is control by bank with help of Forward Rate Differentials. Hence this risk arises when implied rate and actual rate have  difference.
8. Credit Risk:- Occurs due to default of counter-party on or before maturity. So it can be divided by two ways 1.Pre-Settlement Risk- When a party default before maturity of contract 2. Settlement Risk:- Failure of counter-party during settlement. It occurs due to party available in different time zones.