What is meant by currency risk?

Currency risk refers to the potential for an investor to experience losses due to fluctuations in exchange rates between different currencies. When investing in foreign markets or assets denominated in a foreign currency, the value of returns can be significantly impacted by changes in the exchange rate between the investor's home currency and the foreign currency.

For example, if an investor holds an asset in a foreign currency and that currency weakens against the investor's home currency, the value of the returns from that investment, once converted back into the home currency, could decline. This phenomenon illustrates how currency risk can affect investment outcomes, potentially leading to reduced profits or even losses.

Thus, the correct choice highlights the intrinsic nature of currency risk as it pertains specifically to the implications of foreign exchange rates on investment values, making it a crucial consideration for investors who are involved in international markets. The other options address different types of financial risks but do not accurately encapsulate the specific nature of currency risk and its impact on foreign investments.