Final answer:
A small price movement can lead to large impacts on an account with large leveraged exposure in margin financial products. Hedging contracts are one way firms protect themselves from the risk of adverse movements in exchange rates. Retail clients' losses in margined financial products are technically limited to the funds in the account, but leverage can increase the potential loss beyond the margin paid.
Step-by-step explanation:
Can a small movement in price have a large impact on your account balance if you have a large exposure in the margin financial products? Yes, a small price movement can have a disproportionate effect on your account balance when dealing with margined financial products, such as Forex and CFDs, due to the concept of leverage. If you are a "Retail" client with an open position in these products, then losses can technically be limited to the funds in your account. However, due to leverage, the actual loss can exceed the initial margin paid if the price move is significantly against your position.
Risks associated with currency exchange rates impact firms significantly. For example, a U.S. firm exporting to France and receiving payments in euros has to manage the risk of exchange rate fluctuations between the dollar and the euro. By entering into a hedging contract, the firm can lock in an exchange rate for the future, thus protecting itself from the possibility that the euro might decline in value. Financial institutions and brokerage companies typically facilitate such hedging transactions, usually in exchange for a fee or by creating a spread in the exchange rates.