What does 'foreign exchange risk' refer to?

Foreign exchange risk specifically refers to the potential financial loss that may arise from changes in the exchange rates between currencies. When businesses or investors engage in transactions that involve multiple currencies, fluctuations in these exchange rates can lead to unexpected costs or decreased revenue. For instance, if a company based in the UAE sells goods in Europe and receives payment in euros, any depreciation of the euro against the UAE dirham before the transaction is settled could result in a lower amount being converted into dirhams than initially anticipated. Consequently, this exposure to adverse movements in exchange rates characterizes foreign exchange risk, making it a crucial consideration for individuals and companies involved in international financial transactions.

The other options encompass different types of risks, such as commodity price risk and the overall risks linked to international trade and foreign investments, but they do not specifically address the issues arising directly from fluctuations in currency exchange rates, which is the essence of foreign exchange risk.