Foreign exchange risk

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.


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Foreign exchange risk
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