FX Products - Vanilla

1. Spots
Risks:
(i ) Price risk. Delta is used as a measure of spot risk. Delta = PV change/Spot Price change. Note that spot often denotes settlement of T+2 ( with the exception of CAD), so settlement amount will have to be adjusted for these 2days discounting but impact is insignificant. As forex trading is a leveraged product, this means price risks are manifified. Trading in currencies can also be subject to government intervention risks (verbal/non-verbal) which often produces short spikes/kinks in price action as shown by recent episodes of  intervention by SNB and BoJ to halt the swiss franc and yen appreciation. Effectiveness of these measures though are often short-lived as one can see that CHF rebounded on same day. The forex market is so huge that it is impossible for any one party to dominate. However, price actions can be so sharp and swift that one must be emotionally strong to ride through the swings. Forex market is the most liquid compared to other asset classes, so liquidity risk is minimal.
Costs:
(i) Bid-ask spread. Often small due to ample liquidity, especially for major currencies - EUR, JPY, USD, GBP, AUD, CHF. Bid-Ask will widen near close of NY trading.
(ii) Commission charges.
(iii) Margin requirements
(iii)Interest charged on deficits which can arise if PL loss, commission, margin requirements are in currencies different from your base currency. This interest rate charged differs for each ccy and this can be high (just like interest charges on your credit card accounts). You can choose to cover for this deficit depending on your view of market. Eg, if your PL loss in in USD, and you think USD is likely to depreciate further, you may not want to cover if you think the depreciation impact is greater than the interest costs.
(iv) Rollover costs. This will be the swap point. Eg. If you have a spot USD/SGD transacted at 1.2 and this is rolled over the next day, and swap point is 0.001, your effective buy price is 1.2001.

FX market is very sensitive to macroeconomic conditions, risk sentiment, interest rate expectation. Safe haven ccy like CHF, JPY and USD often benefit when market is risk averse. However, in recent, USD has been losing its safe haven status amid concern over its debt limit+ huge deficit and  poor economic outlook with high unemployment.

2. Forwards/NDFs
Forward price (F) = S x (1+R*)/(1+R) or NDF = S x (1+i*)/(1+R), where i is the implied domestic i/r.
Risks
(i) Spot
(ii) Interest rate risk. Measured by PV01. PV01 = PV change/0.01% increase in interest rate. Forward price is also a function of relative interest rates in domestic vs foreign ccy. When taking a forward transaction, you are also taking a view on the interest rate differential. The interest rate risk can be substantial if maturity is long. For risk control and monitoring purpose, this interest rate risk requires a detail segregation into time buckets. Setting limit on total PV01 accounts for parallel shift in yield curve. Setting at individual buckets accounts for twists in the yield curve. For eg, a trader may think that 1y USD/HKD forward is overbought relative to 2y USD/HKD forward. So he sells 1y forward and buys 2y forward as hedge. Spot risk is hedged, total PV01 is small, but trader is running a significant basis in 1y vs 2y buckets and stands to lose if HKD yield curve flattens. Setting bucket limits account for this risk.

NDF evolves due to restricted access to onshore markets for foreign investors. This is especially the case for emerging markets ( CNY, TWD, KRW, IDR, INR, PHP, MYR) where government impose controls to prevent excessive speculation. NDF is thus cash settled in USD and doesn't require physical delivery of the currencies and is an important hedging tool for corporates having exposures in the domestic markets. A unique source of risk is the fixing risk which occurs during market disruption, when uncertainty arises and rates can be fixed at a very different rate from current market sources. I think previously Venezuela or Argentine ran into such a scenario.
As NDF is priced based on interest rates expectation rather than interest rate differencials( since foreigners do not have access to onshore funding markets), the ndf rate can be very volatile depending on shifts in market sentiment. This volatility can be magnified since market is dominated by foreign players having speculative positions and can easily unwind their positions.  During a crisis, market often turns one way and ndf rates can turn wild. You may be forced to liquidate position at a loss due to the lack of liquidity.
For the ndf markets listed above, KRW is the most liquid and onshore players can take part in the ndf market too. NDF market is usually liquid up to 1y.

3. Futures
Futures essentially share the same concept as forwards - involving exchange of cash flows at some future date. The important difference is that future is mtm daily which leads to frequent cash inflows or outflows to meet margin requirements. This feature of future rewrites risk in following ways:
1. Credit Risk. Forwards parties are exposed to credit risks of counterparties whereas futures parties face creadit risks of exchange clearing house but this is reduced significantly due to realising daily mtm PL.
2. Basis Risk. As a hedge, futures possess greater basis risk due to its standardized requirements on delivery dates and underlyings that can be contracted. Forwards offer better hedge as they can be tailored to meet the needs of hedgers.
3. Liquidity Risks. The standardized feature of futures which enables it to be traded easily on exchanges trades off liquidity risk with basis risk. Liquidity is often ample for currency futures and an investor can open/close out the position easily. However, liquidity dries up close to expiry date and that's why investors ususally close out/roll over the contracts before the expiry month. Forwards, on the other hand, are customized contracts which are traded OTC. There's limited liquidity to such a tailored contract. In the event of default, the party to which the forward has been an asset to will have to find another counterparty to enter into a new contract at current market rate, thus suffering from a mtm loss.
4. Funding liquidity Risks. Futures require daily cash settlements and potentially frequent cash outflows to meet margin requirement. This is an issue if the position that is hedged do not have such cash settlements, thus causing cashflows mismatch.