FX Risk

FX (foreign exchange) risk is the uncertainty in returns caused by currency movements when you hold assets denominated in foreign currencies. Example: You buy a EUR bond yielding 3%. The bond performs as expected, but EUR/USD falls 5%—your USD return is roughly −2% (3% yield − 5% FX loss). FX risk can amplify or dampen asset returns unpredictably. For US investors holding European stocks, FX risk can contribute 30-50% of total volatility. Key: FX risk is bidirectional — EUR appreciation boosts USD returns, depreciation hurts. Proper portfolio risk models must include FX volatility and FX-asset correlations (safe-haven currencies like CHF/JPY often appreciate during equity sell-offs, providing natural hedging).