Products & Their RisksQuestion 147 of 398
Currency (exchange rate) risk is the risk that:
a.A domestic company's earnings will fall
b.A bond issuer will fail to pay interest
c.Interest rates will rise sharply
d.Changes in exchange rates will reduce the value of a foreign investment when converted back to the investor's home currency
Explanation
Currency risk arises when an investor holds assets denominated in a foreign currency. If that currency weakens against the investor's home currency, the value of the investment falls when converted back, even if the asset performed well locally. This risk is central to international investing and is not present in purely domestic, home-currency holdings.
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