Foreign Exchange Risk

Foreign Exchange Risk Meaning:
In foreign exchange terminology, foreign exchange risk is the risk that fluctuations in currency exchange rates will adversely affect the value of an investment or contractual transaction. It can also refer to the possibility that a forex trader may have to take a loss on a trading position due to an unfavorable exchange rate movement.

Since just about any form of financial exposure to exchange rate fluctuations involves foreign exchange risk, this especially affects businesses who engage in international commerce. Such corporations will typically look to hedge or protect themselves against foreign exchange risk, as will some fund managers investing in a foreign country’s financial instruments.