Definition of Exchange rate risk

Exchange rate risk is the risk any investor takes on when investing in an asset that is priced in a currency other than their domestic one. The risk is that the exchange rate moves against them, either reducing their profits or exacerbating their losses.

For example, a US-based investor could be up 5% on a Japanese stock, but the Yen may have appreciated by 8% against the dollar, giving them a 3% loss.