Hi,Does anyone know how I go about if I want to quantify the interest rate risk in a foreign currency?

Well, I don't have a method for you, but I have some thoughts on this. It seems to me that the only real risk IS interest rate risk. From a global perspective, diversification potential should eliminate any country specific risk. Currency valuation comes from many different methods, but underlying all of them is the concept of purchasing power. In other words, whether basing valuation on arguments of purchasing power parity, interest rate parity, Fisher relations, etc......nominal rates play a central role which are determined by other underlying factors such as supply/demand for money, inflation, trade balances, and so on. I guess my point is that interest rate risk is a general term that encompasses all the true underlying risks since changes in all the underlying factors result in a change of interest rate. Therefore, measuring the interest rate risk is simply a measure of currency risk as a whole. I am no pro on FX trading, so I am happy to hear some other thoughts on this if someone disagrees.

Hi Bilbo,can you be more precise? You want to evaluate the Fx risk of your options portfolio? what do you have in it: quantos, stocks, IR instruments...? The Fx exposure and the way to evaluate it will depend on each case

I'll try. You make a good point. The risk is dependent upon the instrument. I was reading the original post as a question of "if I am directly holding foreign currency, what is the portion of overall risk that is attributed to interest rates?". I wasn't taking it as holding an option on a stock denominated in foreign currency, and quatifying the interest rate risk embedded in it.