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Currency Risk

Currency risk, also known as exchange rate risk, is the risk that changes in exchange rates will affect the value of international investments, transactions, or earnings. Currency risk impacts businesses involved in international trade, investors holding foreign assets, and tourists traveling abroad. To mitigate currency risk, companies and investors often use hedging strategies such as forward contracts or currency options to lock in exchange rates.

Example

A U.S. company that exports goods to Europe is exposed to currency risk if the Euro depreciates against the U.S. dollar, as the company’s revenue in dollars would decrease.

Key points

• Currency risk is the risk that exchange rate fluctuations will affect the value of international transactions or investments.

• It impacts companies trading internationally, investors in foreign assets, and tourists.

• Hedging strategies, such as forward contracts, can mitigate currency risk.

Quick Answers to Curious Questions

Currency risk affects international businesses by changing the value of revenues, expenses, or profits when exchange rates fluctuate, potentially reducing profitability.

Companies and investors mitigate currency risk through hedging strategies, like forward contracts or currency options, to lock in exchange rates and protect against adverse movements.

Businesses engaged in international trade, investors with foreign assets, and travelers are all exposed to currency risk due to fluctuations in exchange rates.