Exchange Rate Risk

Exchange rate risk, also known as currency risk, is the potential for financial loss due to fluctuations in the value of one currency relative to another. This risk affects companies, investors, and individuals who are exposed to foreign currencies through international transactions, investments, or operations. Exchange rate risk can impact the profitability of exports and imports, the value of foreign investments, and the cost of foreign debt. Businesses and investors manage exchange rate risk through hedging strategies such as forward contracts, options, and swaps, which help mitigate the impact of adverse currency movements.

Example

A U.S. company that sells products in Europe faces exchange rate risk if the euro depreciates against the dollar, reducing the value of its European sales when converted back to dollars.