Foreign exchange risk
Foreign exchange risk reflects the possibility of loss due to adverse changes in the relative values of world currencies.
Suppose an investor buys securities in an Australian company for AUD25 at a time when the exchange rate is one Australian dollar per 75 cents U.S. One year later the share price is AUD30, and 70 cents will buy one Australian dollars.
· To an Australian, the shares appreciated by 20%, from AUD25 to AUD30.
· From the perspective of a U.S. investor, the adverse change in the exchange rate reduced the actual gain on the investment to 12%. The U.S. investor wants to begin and end with U.S. dollars.
· Foreign exchange risk reduced the true economic return from a U.S. investor’s perspective.
Also read: Understanding Risk
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk
Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
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