Economics Exchange Rates Questions
Exchange rate risk refers to the potential for financial losses or gains that arise from fluctuations in exchange rates between two currencies. It is the uncertainty faced by individuals, businesses, and governments when conducting transactions or investments in foreign currencies. Exchange rate risk can impact various aspects such as import and export costs, foreign investments, and international trade. Factors that contribute to exchange rate risk include economic indicators, political stability, interest rates, inflation rates, and market speculation. Managing exchange rate risk involves strategies such as hedging, diversification, and using financial instruments like forward contracts or options to mitigate potential losses.