foreign exchange risk

(redirected from Exchange-Rate Risks)

Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out at a loss due to an adverse movement in exchange rates. In general, the risk of an adverse movement in exchange rates.

Foreign Exchange Risk

The risk that the return on an investment may be reduced or eliminated because of a change in the exchange rate of two currencies. For example, if an American has a CD in the United Kingdom worth 1 million British pounds and the exchange rate is 2 USD: 1 GBP, then the American effectively has $2 million in the CD. However, if the exchange rate changes significantly to, say, 1 USD: 1 GBP, then the American only has $1 million in the CD, even though he/she still has 1 million pounds. Foreign exchange risk is also called exchange rate risk.

foreign exchange risk

The risk that the exchange rate on a foreign currency will move against the position held by an investor such that the value of the investment is reduced. For example, if an investor residing in the United States purchases a bond denominated in Japanese yen, a deterioration in the rate at which the yen exchanges for dollars will reduce the investor's rate of return, since he or she must exchange the yen for dollars. Also called exchange rate risk.
References in periodicals archive ?
Using local currency for cross-border financing is a service usually provided by multilateral development organisations to hedge against foreign exchange-rate risks arising from the settlement in US dollars.
"In this context, Zodiac Aerospace anticipates a further year of organic growth in 2013/14." However, it said it remained exposed to exchange-rate risks and had not implemented new currency hedges since November.
Following the warning by the central bank, Russian companies have boosted efforts aimed at guarding against exchange-rate risks. Trading in forwards, where a company bets on the future exchange rate, climbed 20 per cent to an average of USD2.4bn per day in the first six months of this year from 2009.
In short, there are better ways than gold to hedge inflation risk and exchange-rate risk. TIPS, or their equivalent from other governments, provide safe inflation hedges, and explicit currency futures can offset exchange-rate risks.
Confidence in the region is so high that international investors are again willing to take on exchange-rate risks by buying sovereign and corporate bonds denominated in domestic currencies.
Asia is thirsty for investment, but the existence of more than two dozen currencies increases exchange-rate risks that hamper capital markets.