Currency risk, also known as exchange rate risk, is the possibility that the value of an investment or business transaction will be negatively affected by changes in the exchange rates between currencies.
This risk is a major concern for companies and investors involved in international trade and investment. Understanding and managing currency risk is crucial to protect financial interests and ensure stable returns.
Key Takeaways
Currency risk arises from fluctuations in exchange rates between different currencies.
Macroeconomic factors, government policies, and market sentiment are common causes of currency fluctuations.
Hedging strategies, such as forward contracts and options, can help mitigate currency risk.
Businesses can use natural hedging techniques and diversify their currency exposure to manage risk.
Regularly monitoring exchange rates and consulting financial experts are essential for effective currency risk management.
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