Currency Risk – Simply speaking the risk that occurs given the changes in price in one currency vs. another. This term is also known as exchange rate risk. A company could be said to have currency risk if they have significant assets or sales in one country/currency, but they report earnings in another country/currency. For example, if you are a US auto maker that reports income in $USD, but you also have a large portion of sales in China, you are exposed to currency risk.

Let’s say this company’s car in China sells for 65,200 Yuan in the beginning of the year. When the company reports this sale in USD, it shows a sale of $10,000 at that point in time (based on the exchange rates). However, let’s say the Chinese economy tanks and the value of the Yuan in relation to the dollar also tanks. So now, every car sold in for 65,200 Yuan is now only converting back to $USD at $9000. The company is making $1000 less on every sale because of the value of one currency vs. another. This company was exposed to currency risk because the value of a given sale was exposed to an exchange of currency which is constantly changing.

Economic Risk – It is the likelihood that an international investment will be affected by the political, social, or regulatory climate of the country invested in. This could include new government regulations, civil or external wars, political unrest, etc.

Translation Risk – Is similar to transaction risks, but it deals strictly when one company has to provide a valuation of their assets in one country into their home country’s currency. Therefore, the same risk exists in exchange rate fluctuations, but no actual monetary losses occur unless they sell in those currencies evaluated.