How Forex Brokers Manage Their Risk.

Continuing our discussion on how forex brokers manage their risk, here are a couple of examples from an A-Book broker.

Scenario #1: EUR/USD Rises

Let’s continue with the trade example and see what happens if EUR/USD rises.

As you can see, Elsa’s trade ended up with a profit, which means the broker ended up with an equivalent loss.

But…the A-Book broker ended up with a profit against the LP, who ended up with an equivalent loss.

The profit “covered” the loss so the broker’s final P&L was $0.

Scenario #2: EUR/USD Falls

Let’s see what would’ve happened if EUR/USD fell instead.

As you can see, Elsa’s trade ended up with a big loss, which means the broker ended up with an equivalent gain.

But…because the broker had offloaded its risk to the LP, the broker does not get to celebrate.

The broker ended up with a loss against the LP, who ended up with an equivalent gain.

The loss canceled out the profit so the broker’s final P&L was $0.

If you noticed n the two examples above, the broker did not make any money.

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