Currency Risk in Forex

Currency risk is the possibility that changes in exchange rates alter the value of cash flows, assets, liabilities, or investments when they are measured in another currency.

Where Does Currency Risk Come From?

Currency risk appears whenever the value of something depends on converting one currency into another.

It can affect international businesses, investors holding foreign assets, importers, exporters, and traders with exposure to currency pairs.

Currency Risk and Exposure

The amount that could be affected by an exchange-rate move is often described as currency exposure.

A business expecting a future payment in a foreign currency has exposure because the home-currency value of that payment can change before the money is converted.

Managing Currency Risk

Currency risk can be reduced in several ways, including matching foreign-currency receipts and payments, using hedging instruments, limiting exposure, or accepting some risk as part of the business or investment decision.

The goal is not always to remove every currency movement. It is to understand and control the part that could cause unacceptable damage.

Key Takeaway

Currency risk is the uncertainty created when a value depends on an exchange rate that can change.