What does currency risk refer to in international business?

Currency risk in international business pertains to the potential for losses that companies may incur as a result of unfavorable fluctuations in exchange rates. When a business operates internationally, it often deals with multiple currencies. Changes in exchange rates can impact the value of transactions, investments, or profits made in foreign currencies. For instance, if a U.S. company sells products in Europe and receives payments in euros, a decline in the euro's value against the dollar before the payment is converted can lead to a reduced revenue when exchanged back into U.S. dollars.

This understanding is crucial for businesses engaged in international trade, as they must manage and mitigate this risk to protect their profitability and financial health. Hedge strategies, financial instruments, and careful planning are often employed to combat the uncertainty brought about by fluctuating exchange rates, making awareness of currency risk an essential part of international business management.