Foreign-exchange risk refers to the potential for loss from exposure to foreign exchange rate fluctuations. Foreign-exchange risk is similar to currency risk and exchange-rate risk.

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Foreign-exchange risk is the risk that an asset or investment denominated in a foreign currency will lose value as a result of unfavorable exchange rate fluctuations between the investment's foreign currency and the investment holder's domestic currency. Holders of foreign bonds face foreign-exchange risk, because those types of bonds make interest and principal payments in a foreign currency.

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Now let's assume a year from now the exchange rate is 1: Despite the issuer 's ability to pay , the investor has lost a portion of his return because of the fluctuation of the exchange rate.

Foreign-exchange risk is an additional dimension of risk which offshore investors must accept. As a result, open positions in non-dollar-denominated items may need to be closed.

Though foreign-exchange risk specifically addresses undesirable movements that might result in losses, it is possible to benefit from favorable fluctuations with the potential for additional value above and beyond that of an already-stable investment. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions. Each month, more than 1 million visitors in countries across the globe turn to InvestingAnswers.

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