Currency Risk vs. Exchange Risk: Key Differences

Question:

A risk for U.S. contractors working in foreign countries is the devaluation (loss of value) of a local currency with respect to the U.S. dollar. This is known as which of the following?

A) Currency risk.

B) Exchange risk.

C) Deflation risk.

D) Inflation risk.

Answer:

The risk of devaluation (loss of value) of a local currency concerning the U.S. dollar that U.S. contractors face when working in foreign countries is known as currency risk.

Explanation:

Currency risk, also referred to as exchange risk arises from fluctuations in the exchange rate between currencies. When a contractor earns money in a foreign currency, a devaluation of that currency relative to the U.S. dollar means that when the earnings are converted back to dollars, the amount will be less than anticipated. This can impact profits and financial stability for the contractor.