Question : What is the term used to describe the risk that changes in exchange rates will affect the value of an investment portfolio containing assets denominated in different currencies?
Option 1: Currency risk
Option 2: Credit risk
Option 3: Liquidity risk
Option 4: Market risk
Correct Answer:
Currency risk
Solution : The correct answer is (a) Currency risk.
Currency risk refers to the risk that changes in exchange rates will negatively impact the value of an investment portfolio containing assets denominated in different currencies. Fluctuations in exchange rates can affect the returns and value of investments when they are converted back into the investor's domestic currency. This risk arises due to the volatility and uncertainty in foreign exchange markets. Investors and businesses that hold assets or engage in transactions in multiple currencies are exposed to currency risk.
