Foreign exchange risk (also called FX or currency risk) applies to foreign investments. When there are foreign bonds in the investment portfolio, the return is not only dependent on the fluctuations of market prices on the foreign markets, but also on the fluctuations of the exchange rates between the domestic and the foreign currencies.
The weakening (depreciation against the foreign currency) of the domestic currency is beneficial for the return of the foreign investment, because the currency exchange generates extra returns. When the domestic currency appreciates, the return of the investment decreases, because the performance of the investment worsens in terms of the domestic currency.
When investing in foreign governmental and corporate bonds, one must count with the enhanced FX risk exposure. Investing in American bonds or shares makes investors own securities with US dollar values. Investing in Indian shares makes investors own shares with Indian rupee values.
Some firms in the public and private sectors may decide to issue bonds or other securities in foreign currency. It can happen for plenty of reasons. The most important three are the following: decreasing FX risk, increasing funds only available abroad, and increasing trust in the given bond (and in the currency and solvency as well). There are 13 important foreign bonds:
- Eurodollar bond: a US dollar-denominated bond (issuer: non-US entity outside the US market)
- Kangaroo bond: an Australian dollar-denominated bond
- Maple bond: a Canadian dollar-denominated bond
- Samurai bond: a Japanese yen-denominated bond (issuer: non-Japanese entity on the Japanese market)
- Shibosai Bond: a private placement bond in Japanese market with distribution limited to institutions and banks
- Yankee bond: a US dollar-denominated bond (issuer: non-US entity on the US market)
- Shogun bond: non-yen-denominated bond (issuer: non-Japanese institution or government on the Japanese market)
- Bulldog bond: a British pound-denominated bond
- Matrioshka bond: a Russian rouble-denominated bond
- Arirang bond: a Korean won-denominated bond
- Kimchi bond: a non-Korean won-denominated bond
- Formosa bond: a non-New Taiwan Dollar-denominated bond
- Panda bond: a Chinese renminbi-denominated bond