The risk (also known as a currency correlation risk) that is inherent in cross-currency investments/ positions where the correlation between investment/ position returns and exchange rates impact the performance and outcomes of the entire investment/ position. It is a currency risk that arises in connection with cross-border investing where the returns on foreign assets are measured in the base currency (currency of its domicile).

A correlation coefficient is established an a key input in valuation of such investments/ positions. It measures the relationship between the returns of such foreign assets (denominated in the local currency or home currency) and the exchange rate between the investor’s local currency and the asset’s foreign currency. The returns could be positively or negatively correlated, or uncorrelated, with the exchange rate.

In other different contexts, omega risk denote a currency risk that is embedded in an option contract whose underlying is denominated in a currency other than that of the payoff currency. This type of risk (a quanto risk) arises when the two parties to an option contract agree to record/ report the transaction in a different currency (the reference currency against the base currency). Therefore, it is associated with changes  in exchange rates that impact the reported value of the transaction over the term of the option.

Omega risk may also refer to the currency risk that relate to the need to translate the value of a currency option position in a currency other than the original currency (the base currency).