What is the effect of currency fluctuations on international transactions referred to?

The effect of currency fluctuations on international transactions is referred to as currency risk. This term encapsulates the potential for losses that can occur due to changes in the exchange rates between currencies involved in cross-border transactions. When a company engages in international trade or investment, it faces the uncertainty of how currency values may shift from the time the transaction is initiated to when it is completed.

For example, if a U.S. company exports goods to Europe and agrees on a price in euros, the value of those euros when converted back into U.S. dollars may change due to fluctuations in the exchange rate. If the euro depreciates against the dollar before the transaction is settled, the company could receive less in dollars than initially anticipated, resulting in financial losses.

The term currency risk specifically highlights this exposure to potential losses from these fluctuations, making it the most accurate descriptor in this context. Other terms, like financial risk or earnings risk, might pertain to broader financial uncertainties or specific impacts on profits but do not specifically address the impact of exchange rate movements on transactions as directly as currency risk does. Currency volatility, while related, is more about the degree of variation in exchange rates over time rather than the specific risks that arise from those fluctuations in transactional contexts.