Trading in foreign exchange instruments carry several types of risk and it is consequently not suitable for all investors;
- Foreign exchange risk: pertaining to the foreign currency fluctuations over a period. The value of unhedged exposure or positions may fluctuate rapidly, possibly resulting in substantial losses.
- Interest rate risk: this risk may result in distortions between the interest rates of the two currencies.
- Credit risk: the possibility that one of the parties involved in a Forex transaction does not honor its debt at the end of the contract. This may occur when a financial institution is insolvent.
- Country risk: relates to governments which may invest in the foreign-exchange markets to limit the selling of their currency. There is more country risk with "exotic" currencies than with the principal currencies which allow free trading in their currency.
- Leverage effect risk: in this area, the transactions may be linked to high levels of risk. For example, by making use of leverage effects, a small movement in the exchange rate may result in significant gains or substantial losses.
Before an investors chooses to invest in foreign exchange instruments they should therefore carefully consider their investment objectives, experience and risk willingness. As foreign exchange is high risk instruments investments should only be done with risk capital; which means capital that is not necessary to the survival or wellbeing of the investor.