Foreign Exchange Risk

Foreign Exchange Risk refers to potential losses resulting from fluctuating exchange rates. This risk impacts multinational corporations, exporters, importers, and investors conducting foreign currency transactions. Changes in exchange rates affect cash flows, profit margins, and balance sheets. For instance, a U.S. company exporting to Europe might face reduced revenues if the Euro depreciates against the U.S. Dollar. Similarly, an investor holding foreign bonds could experience a decrease in value due to unfavorable exchange rate movements. Effective management involves strategies like hedging and currency diversification to mitigate impacts.