Currency Risk

Mr. Rakesh is an expert in translation work and last month, he got translational work from USA Company and started work as  freelancer . Mr. Rakesh had earned $ 200 from his translational work. But according to the condition, payment is issued monthly basis and next month’s 15th USA currency is converted into local Indian currency. Mr. Rakesh had suffered loss of Rs. 400 due to decreasing the value of Dollar from $ 47 to $ 45 within 15 days. Now from above example, we can explain that currency risk is risk of loss due to changes the prices of foreign currency. The above example also teaches us that currency risk is not only for traders who trades in currency or foreign exchange market but every person who is providing goods and services in foreign country.

Reasons of Currency Risk:

 There are following reasons of currency risk:-

1. If one currency’s price is inflated and other currency’s price is depreciated.

2. If Demand of currency will increase at domestic level, its price will increase in international level and create currency risk for foreign investors.

3. Currency risk may happen due to outflow of foreign currency. Suppose, some investors start to sell dollars after seeing the strength in Indian currency. It will create more currency risk for other Indian investors who have the US dollars.