The Many Faces of Currency Risk

Rohanna Wise

What is currency risk and how does it affect the average investor? Currency risk exists whenever an investor buys into a fund whose gains and returns are calculated in a currency other than their investment currency. For example, this would mean every investment made in the US except investments into funds that are entirely US-based. Those do exist, but they represent a small portion of investment dollars. Instead, for the vast majority of US investors, their money is not invested in US currency but rather in the equivalent value to the currency of the fund or funds that are being bought into. Simply put, where the settlement currency is not the same as the fund currency, there is currency exposure – which brings currency risk.

More specifically, wherever there is exposure to currency fluctuations, there is a risk that the result of that exchange will not be favourable. It does not matter what the investment is – where there is exposure, there is also risk. Risk, for the vast majority of investors, is something to be avoided, or at least managed in such a way that it is likely to limit the potential for unfavourable results. However, there are scenarios where currency exposure