What does currency risk refer to?

Currency risk, also known as exchange rate risk, specifically pertains to the potential for financial loss that can occur from fluctuations in the value of one currency relative to another. This risk primarily affects investments that involve assets or liabilities denominated in foreign currencies. For example, if an investor holds stocks in a foreign company, changes in the exchange rate between the investor's domestic currency and that foreign currency can significantly impact the returns when profits are converted back to the investor's home currency.

When the value of the foreign currency increases relative to the domestic currency, the returns from the investment gain value upon conversion. Conversely, if the foreign currency depreciates, the returns diminish when converted back to the domestic currency. Therefore, understanding currency risk is crucial for investors dealing with international assets as it directly affects the variability in their investment returns.

The other options address different types of financial risk. The impact of inflation on domestic investments relates to purchasing power and how inflation erodes the value of money over time, which isn't directly linked to currency fluctuations. The risk of a company going bankrupt pertains to credit risk and business viability rather than currency values. Finally, uncertainty in the stock market encompasses a broader spectrum of risk factors without specifically tying to currency exchange rates.