Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Risk

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You are a U.S. investor and you have stocks in France. The return that you will get is affected by both the change in the price of the stocks and the change of the Euro against the U.S. dollar. What kind of risk does this refer to?
  1. Foreign exchange risk.
  2. Liquidity risk.
  3. Interest rate risk.
  4. Geopolitical risk.
Explanation
This is a case of foreign exchange risk, also known as currency risk. It is a form of risk that arises from the change in the price of one currency against another. This risk usually affects businesses that export and/or import and investors who makes international investments.

Key Takeaway: Whenever you have assets or business operations across national borders, you face currency risk if your positions are not hedged. Currency hedging (also known as Foreign Exchange Risk hedging) is used to reduce the risks encountered when investing abroad.
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