Foreign Exchange Risk

Foreign exchange risk, often called currency risk, occurs when the value of one currency changes in relation to another. This can affect businesses and investors involved in international transactions. For example, if a U.S. company sells products in Europe and receives euros, but the euro weakens against the dollar before the company converts it back, they may receive less money than expected. This fluctuation can lead to potential losses. Managing foreign exchange risk typically involves using financial strategies, such as hedging, to mitigate these potential impacts on profitability.