How do exchange rate changes affect international investments?

• A. They do not affect foreign investments; returns are currency-neutral.
• B. They only affect domestic investments; international investments are unaffected.
• C. They impact returns when converting currencies, affecting the value of foreign assets, hedging costs, and risk exposure.
• D. Hedging costs are fixed and not affected by exchange rate movements.

Answer: (C)

When you invest internationally, the value of your returns in your home currency depends on how the exchange rate moves. Returns are earned in the foreign currency, and converting them back to your own currency means the rate at the time of conversion directly affects what you actually receive. If the foreign currency strengthens, your converted returns rise; if it weakens, they fall. Hedging is often used to protect against these moves, but hedging costs can vary with interest rate differentials and market volatility, so they’re not fixed. Currency movements also change your portfolio’s risk exposure in several ways: the cash flows you receive, the value of foreign assets on your books, and long-term economic value due to exposure to another economy. So exchange rate changes influence returns, asset values, hedging costs, and overall risk.