Currency Risk

AAA

DEFINITION of 'Currency Risk'

A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

INVESTOPEDIA EXPLAINS 'Currency Risk'

For example, if you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change in the value of the Canadian dollar against the U.S. dollar. So, if you realize a 15% return in your Canadian stocks but the Canadian dollar depreciates 15% against the U.S. dollar, this will amount to no gain at all.

Academic studies of currency risk suggest - although without absolute certainty - that investors bearing currency risk are not compensated with higher potential returns, meaning it is essentially a needless risk to bear.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Funding Currencies

    Monies that can be borrowed at low interest rates, making them ...
  3. Funding Currency

    The currency being exchanged in a currency carry trade. A funding ...
  4. Commercial Hedger

    A corporation that purchases futures to control its costs. When ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with ...
RELATED FAQS
  1. What are the components of the risk premium for investments?

    The risk premium is the excess return above the risk-free rate that investors require as compensation for the higher uncertainty ... Read Full Answer >>
Related Articles
  1. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  2. Options & Futures

    Exploring Non-Dollar Currencies For Forex Trading

    Learn how investments in foreign currencies can diversify your portfolio.
  3. Mutual Funds & ETFs

    Hedge Against Exchange Rate Risk With Currency ETFs

    Currency moves are unpredictable and can have an adverse effect on portfolio returns. Find out how to protect yourself.
  4. Forex Education

    Corporate Currency Risks Explained

    Transaction, translation and economic risks can affect a company's balance sheet.
  5. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  6. Mutual Funds & ETFs

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  7. Mutual Funds & ETFs

    Finding Fortune In Foreign-Stock ETFs

    Think beyond your borders to reduce the impact of local market downturns.
  8. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  9. Forex Education

    The Ins And Outs Of Corporate Eurobonds

    Corporate eurobonds simplify expansion for MNCs, though there are a few more hoops to jump through.
  10. Mutual Funds & ETFs

    Playing It Safe In Foreign Stock Markets

    Find out some of the lower-risk ways to invest in foreign markets.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center