Currency risk, also known as exchange rate risk, refers to the potential for financial loss due to fluctuations in the value of one currency compared to another. This risk is particularly relevant for businesses and investors engaged in international transactions, as changes in exchange rates can affect profits, costs, and overall financial performance. For example, if a company based in the United States sells products in Europe and receives payments in euros, a decline in the value of the euro against the dollar could reduce the dollar value of those sales. Managing currency risk often involves strategies like hedging or using financial instruments to mitigate potential losses.