Currency risk or exchange rate risk is a form of financial risk that arises from the potential change in the exchange rate of one currency in relation to another. Investors or businesses face an exchange rate risk when they have assets or operations across national borders or if they have loans or borrowings in a foreign currency.An exchange rate risk can result in an exchange gain as well as a loss. To neutralize the risk of a loss (but at the same time forgoing any potential exchange gain), some businesses hedge all their foreign exchange exposure or exposure beyond some predetermined comfort level, which is a way of transferring the risk to another business prepared to carry the risk or has a reverse risk exposure. Hedging can involve the use of a forward contract.A currency risk exists regardless of whether investors invest domestically or abroad. If they invest in the home country, and the home currency devalues, investors have lost money. All stock market investments are subject to a currency risk, regardless of the nationality of the investor or the investment, and whether they are in the same or different currency.
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