Currency risk or exchange rate risk is a form of financial risk that arises from the potential change in the exchange rate of one currency in relation to another. Investors or businesses face an exchange rate risk when they have assets or operations across national borders or if they have loans or borrowings in a foreign currency.An exchange rate risk can result in an exchange gain as well as a loss. To neutralize the risk of a loss but at the same time forgoing any potential exchange gain, some businesses hedge all their foreign exchange exposure or exposure beyond some predetermined comfort level, which is a way of transferring the risk to another business prepared to carry the risk or has a reverse risk exposure. Hedging can involve the use of a forward contract.A currency risk exists regardless of whether investors invest domestically or abroad. If they invest in the home country, and the home currency devalues, investors have lost money. All stock market investments are subject to a currency risk, regardless of the nationality of the investor or the investment, and whether they are in the same or different currency. Some people argue that the only way to avoid currency risk is to invest in commodities which hold value independently of the monetary system.The currency risk associated with a foreign denominated instrument is a significant consideration in foreign investment. For example, if a U.S. investor owns stocks in Canada, the return that will be realized is affected by both the change in the price of the stocks and the change of the Canadian dollar against the US dollar. Suppose that the investor realized a return on the stocks of 15% but if the Canadian dollar depreciated 15% against the US dollar, then the movement in the exchange rate would cancel out the realized profit on sale of the stocks.