What is currency risk?
When money is converted from one currency to another, it gains or loses value depending on the exchange rate. Currency risk is the potential gain or loss for investors who convert money from one currency to another, invest overseas or trade internationally.
Where have you heard about currency risk?
If you've exchanged money for travel, you have been exposed to currency risk. Between 2007 and 2017, the value of the pound decreased relative to the US dollar. So £100 of holiday spending money in 2017 buys fewer US dollars than it did in 2007.
What you need to know about currency risk...
There is always currency risk potentially involved in exchanging money. Currencies move all the time, so it presents both an opportunity and a potential loss to investors and any businesses conducting operations abroad or purchasing supplies from overseas.
As an investor, you can speculate directly in currencies. If you invest in shares you need to be aware of currency swings and the currency risk for firms you're invested in. For example, the British pound bought 10 Chinese yuan in 2015, but now only gets around 8.5. Any British firms buying Chinese goods will have seen the cost of their Chinese purchases increase. They can either put up prices to compensate for the additional costs or reduce their profit margin.
Currency risk can be managed by using currency hedging strategies.