Currency risk, also known as exchange rate risk or forex risk, is the potential for financial loss due to fluctuations in the exchange rate between two currencies. It affects international traders, investors, and businesses with foreign currency exposure and can be managed through hedging strategies. Currency risk can be categorized into transaction risk (from settling trades), translation risk (from converting financial statements), and economic risk (from long-term competitiveness changes).
Example
“A UK investor buys US stocks priced in dollars. If the British pound strengthens from 1.25 to 1.35 against the dollar, the investor's returns are reduced when converted back to pounds, even if the stock price remained steady.”