The currency risk when borrowing and investing abroad

Foreign currency loans, i.e. loans taken out in a foreign currency, continue to enjoy unbroken popularity in Germany. This also applies to foreign investments, for quite similar reasons. The focus here is on positive financial aspects, which result in particular from the correlation of the currencies involved.

For example, a certain exchange rate ratio between domestic and foreign currencies can have a positive effect on the amount of interest.

However, investors and borrowers pay particular attention to the possibility of so-called currency gains. Currency gains are gains that arise when the exchange rate of the foreign currency in which the loan is taken out or the investment is made increases in relation to the domestic nominal currency.

The investment is worth more after the back-calculation

The investment is worth more after the back-calculation

To the dollar as the base currency. When borrowing, the currency gain arises in this context from the fact that the borrower has to spend less money on the repayment of the loan amount than he was paid.

The profits from these relationships can be considerable and the associated risks outweigh them. Accordingly, foreign investment or foreign currency credit has increasingly come into the focus of private investors, while a few years ago only professionals and companies covered their financial needs using this instrument.

However, private investors in particular often forget that currency gains are a speculative business, which is not luck but does require a lot of economic expertise. Because the risk of currency losses is also a mirror image of the chance of currency gains. In this respect, one speaks of the so-called currency risk. Such currency losses occur when the exchange rate of foreign currency does not increase but rather decreases.

If these exchange rate losses are considerable, the resulting financial losses can assume devastating proportions. If an investment abroad has a 4% interest rate, and the corresponding foreign currency also loses 4% in value, which, given the current unsettled mood on the financial market, should not be very unlikely, the interest gain from a domestic perspective is not more available.

This example shows which dangers can result from currency losses

bank

The same applies, of course, to the foreign loan, where the debt service increases. In this respect, the economically inexperienced investor or borrower should always consider the risk of currency risk when borrowing and investing abroad and should not readily refer to advice from bank employees or investment advisers who recommend certain investments from generally receive high commissions from the relevant bank.

Especially in view of the current exchange rate situation and the steadily rising dollar exchange rate, the risk of a currency loss predominates. Correspondingly, the possible currency gains are higher than ever, but investors or borrowers should only accept the associated risk if they have at least a calculable certainty about the further development of the various exchange rates.