Exchange rate risk, also known as foreign exchange risk or currency risk, arises when the value of one currency fluctuates relative to another. This can have a significant impact on businesses and individuals who conduct transactions across borders.
There are a number of strategies that can be used to avoid exchange rate risk. One common approach is to use forward contracts. A forward contract is an agreement to buy or sell a certain amount of currency at a specified price on a future date. This allows businesses to lock in an exchange rate today, even if the rate is expected to fluctuate in the future.