Forex glossary
Diversification
Diversification spreads exposure among holdings that do not move identically and can reduce some portfolio risk. Common factors, trade direction and size matter more than simply counting instruments. Correlations change and losses remain possible.
Illustrative example
How does it work in practice?
In a hypothetical portfolio, you buy 5,000 EUR against USD and 5,000 GBP against USD. There are two pairs, but both can lose when USD strengthens; symbol count does not prove independent risk.
A case to work through
Three symbols, one shared direction
Model: long EUR/USD, long GBP/USD and short USD/JPY; quantities are assessed separately.
- The first two positions sell USD against other currencies.
- The third also sells USD; symbol count does not remove that shared direction.
What follows? Record exposure to each currency before assessing the portfolio.
Example boundary: Do not assume identical percentage moves or fixed correlations.
A useful distinction
Diversification / Portfolio Risk
Portfolio risk assesses combined risk; diversification helps shape its structure.
Check your understanding
Identify repeated exposure to the US dollar.
Show the answer and explanation
Selling USD against other currencies
Both purchases and the USD/JPY sale have that direction.
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Related terms
Sources and documentation
- BIS MAR10: market risk terminology
VaR at a stated horizon/confidence and expected shortfall as a tail mean.
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The example illustrates the mechanism. Check current account conditions and instrument specifications with the provider.