CISI Introduction To Securities And Investment Practice Exam

When a bond is denominated in a foreign currency, the cash flows you receive (coupons and redemption) are in that currency, and their value in your home currency depends on exchange rates at the time you convert them. If the foreign currency strengthens against your home currency, your returns rise when measured in your home currency; if it weakens, your returns fall. This currency movement risk is the exchange rate risk. For example, a UK investor holding a dollar-denominated bond will see the pound value of the coupon payments and principal change with USD/GBP movements, regardless of how the bond performs in dollars. Inflation risk relates to purchasing power, credit risk to the issuer’s ability to pay, and liquidity risk to how easily you can sell; none of these capture the impact of exchange rate changes on returns.