Foreign exchange risk, also known as currency risk, refers to the potential for financial loss arising from fluctuations in exchange rates between currencies. This risk affects businesses and investors engaged in international transactions, as changes in currency values can impact the cost of imports, exports, and foreign investments. For example, if a company’s revenue is denominated in a foreign currency that depreciates against its home currency, its earnings may decrease when converted back. Effective management of foreign exchange risk includes using hedging strategies such as currency swaps or options, diversifying currency exposure, and monitoring market conditions to mitigate potential losses.

Basel scope:

• Pillar 1
• Pillar 2

Capital requirements:

Mitigated by Capital

Related Links:

•       BCBS 158 - Revisions to the Basel II market risk framework
•                 Basel Framework