Currency Risk (Exchange Rate Risk)
The risk that exchange rate moves reduce the value of foreign investments.
What is Currency Risk (Exchange Rate Risk)?
A US investor in foreign securities is exposed to the local currency as well as the security. A strengthening dollar reduces the dollar value of foreign holdings. ADRs are priced in dollars but still carry currency risk, because the underlying shares are valued in the foreign currency.
Currency Risk (Exchange Rate Risk): a worked example
Japanese stocks up 10% in yen terms can lose money for a US investor if the yen falls 15% against the dollar.
More terms in Economics & Financial Reporting
Business Cycle
The recurring pattern of expansion, peak, contraction, and trough.
Leading, Coincident & Lagging Indicators
Data series that move before, with, or after the business cycle.
Deflation vs. Disinflation
Falling prices versus a slowing rate of price increases.
Currency Valuation & Exchange Rates
What one currency buys of another, and who wins when it moves.
Sovereign Debt
Bonds issued by a national government.
Trade Deficit
A country imports more goods and services than it exports.
Income Statement
Revenue, expenses, and profit over a period of time.
Balance Sheet
Assets, liabilities, and equity at a single point in time.