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What is currency risk and how does it affect my foreign investments?

All investments carry market risk or the potential for the investment itself to lose money. When you invest in foreign countries, you assume an additional risk that your return on the investment may be decreased or increased when it is converted back into Canadian dollars.

This is called currency risk. Whether you win or lose on the exchange depends on whether our dollar weakens or strengthens against the currency of the country where you made your investment.

Consider this example:   You bought $5,000 (U.S.) of McDonald's Corp. shares on the New York Stock Exchange a year ago. The shares went up so that now your investment, in U.S. dollar terms, is worth $6,000. That's a 20 per cent gain on the stock.

However, if the Canadian dollar has lost some of its value against the U.S. dollar after you made the investment, your gain will be more than 20 per cent because you will end up with more Canadian dollars on the exchange than you would have received a year earlier.

If our dollar had instead strengthened against the U.S. dollar, your 20 per cent gain in the U.S. market would be reduced after the exchange. Foreign investing, for Canadians, is a way of profiting from a falling loonie. If our currency instead increases in value, that will cost you money. If you have a loss in the foreign market, that loss would be increased if the Canadian dollar has strengthened. If you own mutual funds invested in foreign markets, you have currency risk. Some funds use offsetting investments to reduce or hedge this risk. An investment that is appropriate for one investor will not necessarily meet your objectives. Consider seeking professional advice before making investment decisions.