Lucas Thomas99_ Nelson

View translation

What is contagion risk in forex and how has it played out historically?

Contagion risk means crises in one country spreading to others through trade, capital flows, or sentiment. Examples: the Asian Crisis (1997), Russian default (1998), and Eurozone debt crisis (2010s). In each case, regional currencies collapsed, and global volatility spiked. Institutions model contagion through correlations and credit spreads, while retail traders can observe risk aversion via indices like the VIX. Benefits: awareness of interconnectedness. Risks: underestimating contagion leads to exposure across multiple pairs simultaneously. Contagion teaches that diversification across regions is not always enough—global sentiment can unify market direction in crises.