Currency risk

This is the type of risk that comes from the change in price of one currency against another. It arises when you have your money invested in assets denominated in another currency, the risk being that the exchange rate will move against you and reduce their value. If you are a British investor with stocks in the US, whatever return you get is affected by the change in the stocks’ price and in the US dollar against the pound. If you realised a return of 10% on your stocks but the US dollar depreciated by 10%, you’d have made no gain. Investors or firms who have operations or assets abroad will face currency risk unless they hedge their positions.

• See Tim Bennett’s video tutorial: Depository receipts: An easy way to invest in foreign firms.