what is foreign exchange risk 
foreign exchange risk refers to the losses that an international financial transaction may incur due to currency fluctuations also known as currency risk fx risk and exchange rate risk it describes the possibility that an investment s value may decrease due to changes in the relative value of the involved currencies investors may experience jurisdiction risk in the form of foreign exchange risk investopedia julie bangunderstanding foreign exchange riskforeign exchange risk arises when a company engages in financial transactions denominated in a currency other than the currency where that company is based any appreciation depreciation of the base currency or the depreciation appreciation of the denominated currency will affect the cash flows emanating from that transaction foreign exchange risk can also affect investors who trade in international markets and businesses engaged in the import export of products or services to multiple countries the proceeds of a closed trade whether it is a profit or loss will be denominated in the foreign currency and will need to be converted back to the investor s base currency fluctuations in the exchange rate could adversely affect this conversion resulting in a lower than expected amount an import export business exposes itself to foreign exchange risk by having account payables and receivables affected by currency exchange rates this risk originates when a contract between two parties specifies exact prices for goods or services as well as delivery dates if a currency s value fluctuates between when the contract is signed and the delivery date it could cause a loss for one of the parties there are three types of foreign exchange risk companies that are subject to fx risk can implement hedging strategies to mitigate that risk this usually involves forward contracts options and other exotic financial products and if done properly can protect the company from unwanted foreign exchange moves foreign exchange risk examplean american liquor company signs a contract to buy 100 cases of wine from a french retailer for 50 per case or 5 000 total with payment due at the time of delivery the american company agrees to this contract at a time when the euro and the us dollar are of equal value so 1 1 thus the american company expects that when they accept delivery of the wine they will be obligated to pay the agreed upon amount of 5 000 which at the time of the sale was 5 000 however it will take a few months for delivery of the wine in the meantime due to unforeseen circumstances the value of the us dollar depreciates versus the euro to where at the time of delivery 1 1 10 the contracted price is still 5 000 but now the us dollar amount is 5 500 which is the amount that the american liquor company will have to pay 