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risk premium

The risk premium is the extra compensation —in terms of rates of return— required for holding assets that are considered riskier than AAA-rated government bonds. In FX markets, the risk premium is visible in the difference in interest rates between low-risk currencies such as USD, CFH and EUR, and riskier currencies such as TRY, BRL or RUB.

Because of this risk premium, high-yielding currencies trade at a forward discount rate to safe currencies. The difference between forward and spot exchange rates, measured in ‘pips’, is known as forward points. By delaying hedging as much as possible, Currency Management Automation solutions allow firms to minimise the impact of unfavourable forward points.