Currency exposure, also known as foreign exchange exposure, refers to the risk that changes in exchange rates will negatively affect the value of an investor's or company's assets, liabilities, or cash flows denominated in foreign currencies. It is categorized into transaction exposure, translation exposure, and economic exposure. Managing currency exposure is critical for multinational corporations and international investors to protect profit margins and portfolio returns.
Example
“A US-based investor holding European stocks denominated in euros has currency exposure — if the euro weakens against the dollar by 5%, the investor's returns are reduced by that amount even if the stock prices remain unchanged.”