Excerpt from Term Paper:

...... There are also non-qualitative, or financial risks, associated with foreign currency loans. Namely, because foreign currencies can be effected by such uncontrollable as political, governmental and natural factors, a foreign currency can suddenly change in a manner that either significantly benefits or disadvantages the borrower. For example, often time the rate of a foreign currency is based on such things as internal, regional or international political conditions. If a particular country has a significant political upheaval, the instability associated with such an event can have a negative impact on a nations economy, which of course effects the foreign currency exchange rate and, thus, the borrowers investment. When such an event happens to a nation with a dominant currency, this change can have devastating effects on a loan, as was the case following the September 11, 2001 terrorist attacks on the United States
Another means to reduce risk is to use hedging techniques. A hedge is essentially an investment that is taken out for the specific purpose of reducing or canceling the risk associated with another investment while still allowing the borrower to profit from his or her investment. As applied to foreign currencies, hedging can be accomplished in two

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