Glossary · UK
What is Currency Risk?
The risk that changes in exchange rates reduce the value, in an investor's own currency, of assets or income held or earned overseas.
Full Definition
Currency risk (also called exchange rate risk) is the risk that movements in exchange rates change the value, once converted back into an investor's home currency, of an investment, income stream or transaction denominated in a foreign currency, separately from any change in the underlying asset's own local value or price. A UK investor holding US shares, for example, is exposed to currency risk on top of ordinary share price risk: even if the shares rise in dollar terms, a weakening dollar against sterling over the same period could mean the investment is worth less, or the same, once converted back to pounds, and the reverse is equally possible if sterling weakens instead. Currency risk affects UK households and businesses well beyond direct share ownership, including anyone with a mortgage or income in a foreign currency, exporters and importers pricing goods internationally, expatriates receiving a pension or salary from abroad, and holiday-makers converting sterling into foreign currency for a trip. Some investment funds, particularly bond funds and certain global equity funds, offer a currency-hedged share class, which uses financial instruments to reduce or largely remove currency risk relative to the investor's home currency (usually for an additional cost), while unhedged share classes leave the currency movement as an additional source of potential gain or loss layered on top of the underlying investment performance, meaning the choice between hedged and unhedged funds is itself a decision about how much currency risk an investor is willing to take on.