Currency risk, also known as exchange rate risk, is a significant factor in emerging market investments. It arises from the potential for fluctuations in the exchange rate between the investor's home currency and the currency of the emerging market investment. These fluctuations can impact the return on investment, both positively and negatively.
Impact of Currency Risk:
Positive Impact: When the emerging market currency appreciates against the investor's home currency, the investment gains value in terms of the home currency. This can enhance returns, especially if the investment itself is performing well.
Negative Impact: Conversely, when the emerging market currency depreciates, the investment loses value in terms of the investor's home currency. This can erode returns, even if the investment itself is performing well.
Examples of Currency Risk Impact:
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