The changes in global exchange rates bear a significant impact on value of investments. The variations in price of one currency compared to another is known as currency risk or exchange-rate risk.
*The fluctuations in currency prices also tend to impact a company’s stock prices. Hence, majority of investors witness a knock-on effect of these currency changes via stocks.
*As the name suggests, zero correlation is when stock prices are not influenced by variations in exchange rates. For instance, it may happen that Japanese carmaker Toyota’s share price doesn’t change while yen falls 2% in value.
*It occurs when stock prices fall while the domestic currency depreciates. For example, if the stock price of Apple Inc were to fall with a depreciation of US dollar, it would be a case of positive correlation.
*There are several exchange traded funds (ETFs) and mutual funds designed to lower currency risk. They do so by being hedged, typically using forex, options, or futures.