Foreign Exchange Risk is the risk that comes from using a currency other than your own. In other words, it is the difference between the value of a currency in a foreign country and the value of that same currency in your country. Forex or FX as it is also known, is the abbreviation for foreign exchange and investing in forex can be extremely profitable or disastrous. However, many people still fail to understand how forex works and what factors affect its value. As a result, they end up losing money by trading currencies without understanding how to do so safely.Foreign exchange risk mainly affects those who use foreign currencies to make direct investments or to purchase goods and services from other countries. There are two major types of foreign exchange risk— direct investment and consumerism. Direct investment refers to any financial transaction made with a foreign currency that directly affects an investor’s business.For example, if an Australian investor wanted to purchase assets in England, he would use British pounds instead of Australian dollars when making his transaction. Buying with foreign currency immediately affects your business because you are effectively borrowing money from abroad at interest rates set by the market.Consumerism refers to buying goods or services with foreign currencies that you intend to use outside of your home country. Buying souvenirs or taking overseas trips using local currency can increase your spending and create debt for your country at the expense of the global economy.
