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Describe how exchange rate fluctuations influence return

Describe how exchange rate fluctuations influence the return from a foreign market measured in dollar terms. Describe the empirical evidence on the effect of exchange rate uncertainty on the risk of foreign investment.
Mostly exchange rate fluctuations contribute to the risk of foreign investment through its own volatility as well as its covariance along with the local market returns. The covariance tends to be positive in mostly cases, implying that exchange rate changes tend to add to exchange risk, instead of offset it. Exchange risk is found to be much more important in bond investments than in stock investments.

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