The risk that arises from potential fluctuations in the fair value (FV) or future cash flows of a financial instrument over time due to changes in currency rates (foreign exchange rates). The more volatile an exchange rate is, the higher the foreign exchange risk associated with an instrument or investment denominated in a foreign currency.

Foreign exchange risk (also known as currency risk) may result from multiple types of exposures including: transaction exposures, pre-transaction exposures, translation exposures, and economic exposures.

For example, transaction exposures may involve current transactions that result in cash flows denominated in a foreign currency, and hence will have a foreign exchange risk impact.