Why is understanding currency risk important for investors?

Understanding currency risk is crucial for investors because it directly impacts the value of foreign investments due to fluctuations in exchange rates. When an investor holds assets in a currency different from their home currency, any change in the exchange rate can alter the returns they realize upon converting their investments back into their home currency.

For instance, if an investor's foreign asset appreciates, but the foreign currency depreciates against the investor's home currency, the overall return may be less than expected or even negative when converted back. Conversely, if the foreign currency strengthens, it can enhance the returns from that investment when realized in the home currency. This relationship emphasizes the significance of currency risk in determining the actual financial outcome of investing abroad, making it vital for investors to understand and manage this risk in their investment strategies.

The other options, while related to various aspects of investing, do not accurately capture the importance of currency risk. They either involve broader concepts or factors that do not precisely address the specific implications of currency fluctuations on investment returns.