Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does currency exchange risk involve?

1. Risk associated with stock market fluctuations

2. Risk of loss from changes in currency values affecting investments

3. Risk of inflation impacting bond investments

4. Risk of default on fixed-income securities

The correct answer is: Risk of loss from changes in currency values affecting investments

Currency exchange risk specifically pertains to the potential for loss that an investor or business may experience due to fluctuations in the value of currencies. When investments are made in foreign currencies, any change in exchange rates can directly affect the returns when converting the investment back to the home currency. For example, if a U.S. investor holds stock in a European company, and the Euro weakens against the U.S. dollar, the investor may realize reduced returns when converting any gains back to dollars, even if the stock's price in Euro terms has increased. This type of risk is particularly significant for multinational corporations and investors with international investments, as it can lead to unforeseen losses that are not related to the underlying performance of the investment itself. Understanding currency exchange risk is crucial for managing international portfolios effectively and for making informed investment decisions.