Which of the following correctly describes the concept of 'foreign exchange risk'?

The concept of 'foreign exchange risk' pertains to the potential for financial loss due to fluctuations in currency exchange rates. When an investment is made in a foreign currency, the value of that investment can change, not only based on its performance but also due to changes in the exchange rate between the investor's home currency and the currency of the investment. This means that even if the value of the underlying asset increases, the returns could diminish if the foreign currency depreciates against the home currency.

In contrast, the impact of tariffs on international investments is related to trade policies and costs associated with importing and exporting goods, which can affect profitability but does not directly relate to currency fluctuations. Similarly, losses due to political instability include risks such as expropriation or changes in laws that might affect an investment, but these factors do not directly involve the changes in currency values that characterize foreign exchange risk. Therefore, the accurate description of 'foreign exchange risk' is the exposure to fluctuations in currency that directly affects returns on investments denominated in foreign currencies.