Currency risk is the risk that an investment's value will be affected by changes in the relative value of two different currencies. It is the risk that an investor will experience losses due to fluctuations in exchange rates.
Currency risk, also known as exchange rate risk, is the risk associated with fluctuations in the value of one currency relative to another. It is the risk that arises from the change in price of one currency against another. Currency risk affects businesses, investors, and individuals who have exposure to foreign currencies.
For businesses, currency risk can arise from international trade, foreign investments, and foreign borrowing. When a business buys or sells goods or services in a foreign currency, it is exposed to currency risk. If the exchange rate changes, the value of the transaction may be affected. Similarly, when a business invests in foreign markets, it is exposed to currency risk. If the exchange rate changes, the value of the investment may be affected. Finally, when a business borrows in a foreign currency, it is exposed to currency risk. If the exchange rate changes, the cost of the loan may be affected.
For investors, currency risk can arise from investing in foreign markets. When an investor buys or sells securities in a foreign currency, they are exposed to currency risk. If the exchange rate changes, the value of the investment may be affected. Similarly, when an investor invests in foreign markets, they are exposed to currency risk. If the exchange rate changes, the value of the investment may be affected.
For individuals, currency risk can arise from travelling abroad. When an individual travels abroad, they are exposed to currency risk. If the exchange rate changes, the cost of their trip may be affected. Similarly, when an individual sends money abroad, they are exposed to currency risk. If the exchange rate changes, the amount of money they receive may be affected.
Currency risk can be managed through hedging strategies. Hedging strategies involve taking offsetting positions in different currencies to reduce the risk of losses due to exchange rate fluctuations. For example, a business may enter into a forward contract to buy a foreign currency at a fixed rate in the future. This will protect the business from losses due to exchange rate fluctuations. Similarly, an investor may enter into a currency swap to exchange one currency for another at a fixed rate. This will protect the investor from losses due to exchange rate fluctuations.
In conclusion, currency risk is the risk associated with fluctuations in the value of one currency relative to another. It affects businesses, investors, and individuals who have exposure to foreign currencies. Currency risk can be managed through hedging strategies such as forward contracts and currency swaps.