3.4.3.1.7. Currency Risk
Currency risk is the risk that an investment in a foreign security may lose its value due to a strengthening of the U.S. dollar against the foreign country’s currency. For example, imagine that you invest in a Japanese security that is trading on a Japanese exchange. If the dollar strengthens against the Japanese yen, you will get fewer American dollars when you sell your Japanese security. An investor can buy puts against the Japanese yen to protect herself against currency risk.
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SUMMARY TABLE |
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Type of Investment Risk |
Investments Most Affected |
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Market Risk |
Stocks |
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Credit Risk |
Municipal bonds Corporate bonds Not U.S. Treasury bonds |
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Interest Rate Risk |
Fixed-income securities, such as bonds and preferred stock |
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Purchasing Power Risk |
Fixed-income securities, such as bonds |
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Call Risk |
Callable bonds |
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Liquidity Risk |
Thinly traded stocks and bonds DPPs Municipal securities Hedge funds Private placements |