Definition
Currency risk (foreign exchange risk) arises when investments are denominated in foreign currencies. Returns depend not only on asset performance but also on exchange rate movements. A strong dollar reduces returns from foreign investments when converted back; a weak dollar enhances them. Hedging can mitigate this risk.
Formula
Total Return = Local Return × (1 + Currency Change)
Example
Your European stock gains 10% in euros, but the euro falls 5% vs. dollar. Your dollar return is only about 4.5%.
FAQ
What is Currency Risk?
The risk that exchange rate changes will affect investment returns.
How do you calculate Currency Risk?
A common formula for Currency Risk is: Total Return = Local Return × (1 + Currency Change)
Why is Currency Risk important?
Currency Risk helps investors evaluate international and make more informed decisions.