Question : What is the term used to describe the risk that changes in interest rates will impact the value of fixed-income investments denominated in foreign currencies?
Option 1: Interest rate risk
Option 2: Credit risk
Option 3: Market risk
Option 4: Liquidity risk
Correct Answer:
Interest rate risk
Solution : The correct answer is (a) Interest rate risk.
Interest rate risk refers to the risk that changes in interest rates will impact the value of fixed-income investments denominated in foreign currencies. When interest rates change, the value of fixed-income securities, such as bonds, can fluctuate. This is because changes in interest rates affect the present value of future cash flows associated with these securities.
In the context of foreign currency investments, interest rate risk arises from the relationship between interest rates and exchange rates. Higher interest rates in a particular country can attract foreign investors seeking higher returns. This increased demand for the country's currency can lead to currency appreciation. On the other hand, lower interest rates can result in currency depreciation.
