Exchange rate risk, also known as currency risk or forex risk, is the potential for an investment's value or a business's profitability to be adversely affected by unexpected changes in the exchange rate between two currencies. For Indian investors holding international assets — such as US stock ETFs, global mutual funds, or foreign bonds — a strengthening of the Indian rupee against the US dollar reduces the rupee-denominated value of their foreign holdings even if the underlying assets perform well in local currency terms. Conversely, a weakening rupee amplifies returns from foreign assets when converted back to INR. Indian exporters (such as IT services companies) benefit from rupee depreciation (their USD revenues are worth more in INR), while importers (such as oil companies and electronics manufacturers) are hurt. Exchange rate risk can be managed through currency hedging using forward contracts, currency swaps, or currency-hedged fund variants. For Indian mutual fund investors investing in international funds, most schemes are unhedged — meaning the fund's returns include both the underlying asset performance and the currency movement between INR and the investment currency.
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