What risks confront dealers in the foreign exchange market? How can they cope with these risks?
ANSWER. Foreign exchange dealers must cope with exchange risk, because of the foreign currency positions they
take. They also bear credit risks since the counterparties to the trades they enter into may not honor their obligations.
They can cope with currency risk by using forward contracts and currency options (see Chapter 10), widening their
bid-ask quotes, and limiting the position they are willing to take in any one currency. They can limit credit risk by
restricting the position they are willing to take with any one customer and by setting margin requirements that vary
with the riskiness of their customers (banks will generally not do this).