Products & Their RisksQuestion 156 of 398
A U.S. investor buys a bond denominated in euros. The euro then falls sharply against the dollar. The investor has been hurt primarily by:
a.Credit risk
b.Currency (exchange rate) risk
c.Legislative risk
d.Reinvestment risk
Explanation
When the investor converts euro-denominated interest and principal back into dollars, a weaker euro means fewer dollars, reducing the return even if the bond itself performed as expected. This is currency, or exchange rate, risk, which is inherent in holding foreign-currency assets. It is separate from the issuer's credit quality.
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