Exchange Rate Risk and Its Impact on Cross-Border Investments

Abstract

Exchange rate risk has become an important issue in the global financial system due to the increasing integration of international financial markets and the expansion of cross border investment activities. This study aims to examine the relationship between exchange rate volatility, exchange rate risk, and cross-border investment. The study applies a systematic literature review method to identify, evaluate, and synthesize relevant academic studies discussing the impact of currency fluctuations on international investment and corporate decision making. The findings indicate that exchange rate volatility increases uncertainty in international financial markets, which can discourage foreign investors from allocating capital to foreign economies and reduce foreign direct investment inflows. In addition, exchange rate risk also influences corporate investment behavior because firms exposed to currency fluctuations may experience changes in expected cash flows and investment returns. As a result, multinational corporations often implement risk management strategies to mitigate the negative effects of exchange rate instability. Overall, stable exchange rate conditions and effective risk management practices play an essential role in supporting sustainable international investment activities.