What does foreign exchange risk refer to in investment terms?

Foreign exchange risk refers to the possibility of losses an investor may face due to fluctuations in foreign exchange rates. This risk arises when an investor holds assets denominated in a foreign currency, as changes in exchange rates can directly impact the value of those investments when converted back to the investor's home currency. If the foreign currency weakens against the home currency, the value of the investment declines, leading to potential losses.

In contrast, the other options relate to different types of financial risks. Interest rate risk involves potential losses due to changes in interest rates, stock market risks relate to the volatility of stock prices during market downturns, and inflation risk pertains to the erosion of purchasing power and asset value due to rising prices. Thus, option B accurately captures the essence of foreign exchange risk in investment terminology.