Which risk can be associated with bonds that involve currency fluctuations?

Currency fluctuations can significantly affect the returns on bonds issued in a foreign currency. This risk is referred to as exchange rate risk. When an investor holds bonds denominated in a foreign currency, any change in the value of that currency relative to the investor's domestic currency can lead to losses or gains. For example, if a bond is issued in euros and the euro depreciates against the U.S. dollar, the value of the bond, when converted back to dollars, will decrease even if the bond itself remains strong in its native currency.

This risk is particularly critical for international bondholders because it directly influences the purchasing power of their returns. Investors must consider exchange rate movements and their potential impact on the cash flows received from these bonds.

In contrast, other types of risk mentioned do not directly relate to fluctuations in currency value. Credit risk pertains to the likelihood of default by the bond issuer, interest rate risk deals with changes in interest rates impacting a bond's market value, and call risk involves the issuer redeeming a bond before maturity, usually when interest rates fall.