currency risk
The potential for investment returns to be affected by changes in exchange rates when investing in assets denominated in foreign currencies.
Example
“Her Japanese stock investment lost 5% despite the stocks rising 10% — the yen weakening 15% created currency risk.”
Memory Tip
CURRENCY RISK = exchange rate moves can destroy returns. Hedge it or accept the extra uncertainty.
Why It Matters
Currency risk matters because it can significantly impact your investment returns even if the underlying asset performs well. When you invest in foreign currencies, a strengthening of your home currency can reduce your gains or increase your losses, making it crucial to understand and manage this exposure.
Common Misconception
Many people assume that currency risk only affects international investors or large corporations, but any individual investing in foreign stocks, bonds, or real estate faces this risk. Even passive index funds that include international holdings expose average investors to currency fluctuations they may not realize.
In Practice
Suppose you invest 10000 dollars in a European stock fund when the exchange rate is 1 dollar equals 0.85 euros. The stock rises 10 percent in value to 11000 dollars worth of euros, but if the euro weakens to 0.75 against the dollar before you sell, your investment is worth only 9900 dollars, resulting in a net loss despite the stock gaining value.
Etymology
CURRENCY (money of a particular country) RISK (potential for loss). RISK from CURRENCY exchange rate movements.
Common Misspellings
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Related Terms
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See Also
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