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Currency risk


The risk that changes in exchange rates will affect the profitabiliy of any activity between the time when one is committed to it and the time wher is carried out. This affects foreign trade, foreign lending, and foreign direct investment. Commitment may arise from a contract, as in export sales or foreig currency loans, or from incurring sunk costs, as in foreign direct investment or setting up foreign distribution systems for exports. It is possible to reduce currency risk by use of forward currency markets, at a cost, but only for relatively short time periods.


Reference: Oxford Press Dictonary of Economics, 5th edt.