When is a bond holder suject to exchange rate risk? When domestic currency appreciates in comparison to foreign currency or when domestic currency depreciates? Could anyone please explain with an example? Thanks,in advance.
Anyone who can help?
When the bond is denominated is a cruuency other than the bondholder’s home currency.
Finance people use the term “risk” to mean anything different from what’s expected, not merely the risk of loss. You can have a result different from what is expected is the foreign currency appreciates (which is good, but different), and if the foreign currency depreciates (which is bad, and different); either is a risk.
Suppose that your home currency is GBP, and you have a bond denominated in JPY, which, at today’s exchange rate, should pay you GBP30 every six months. If the JPY appreciates 10%, then you’ll get a payment of GBP33, which is good. If the JPY depreciates 20%, you’ll get a payment of GBP24, which is bad. Both are different from GBP30, so each is a risk.
You’re welcome, in arrears.
Thank you sir
My pleasure.