Currency Risk
The risk that exchange rate movements change the value of an investment or cash flow measured in the home currency.
Formula
Return in Home Currency = (1 + Foreign Return) x (1 + Currency Change) - 1
Unit
%
In depth
Currency risk affects any investment denominated in a foreign currency and any company with foreign revenue, costs or borrowings — so an Indian IT exporter carries it even though its shares trade in rupees. The two returns compound rather than add, which is a detail that matters over large moves. Hedging is possible through forwards and futures but costs the interest rate differential, which for the rupee against the dollar has historically been a meaningful annual drag. A long-run rupee depreciation trend means unhedged foreign assets have often benefited Indian investors, which is a historical observation and not a forecast.
Worked example
A foreign holding returns 9% while the rupee weakens 4% against that currency. The rupee return is 1.09 x 1.04 - 1 = 13.4%, not 13% — and a 4% rupee strengthening would have given 1.09 x 0.96 - 1 = 4.6%.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Currency Risk” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.