What does the term "currency risk" refer to?

The term "currency risk" specifically refers to the potential for financial losses arising from fluctuations in exchange rates between currencies. This type of risk is particularly relevant for investors or businesses that are involved in international transactions, as the value of investments or earnings can change dramatically due to variations in currency values. For instance, if a U.S. investor holds foreign assets, a decline in the value of that foreign currency against the U.S. dollar can decrease the value of their investment when converted back to dollars.

Understanding currency risk is essential for making informed decisions in global markets, as it can impact everything from the pricing of goods to the profitability of overseas investments. The other choices pertain to different types of financial risk, such as credit risk in bond investments, equity risk in stocks, and interest rate risk, which do not specifically relate to currency exchange fluctuations. Each of these represents distinct financial challenges, but "currency risk" is particularly focused on the influences of varying exchange rates.