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Converting FX Trading P&L Between Currencies Using Bid and Ask Rates

Article Quant Q&A · Author: Blaze
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Summary

The document discusses how to convert a foreign-currency trading gain or loss into a home currency, using a USD/JPY trade as its example. It reports a loss measured in yen and explains that conversion into dollars uses the rate applicable to selling dollars for yen, which is the bid side of the USD/JPY quote. The same reasoning applies when converting profit through a different currency pair: identify which currency is being sold and which is being bought, then use the corresponding executable quote side.

The answers are not fully consistent about whether the example uses a quoted bid and ask or a single stated market rate. One response advises calculating both sides and taking the less favorable conversion when the spread applies. The discussion is a practical explanation of quote direction rather than a general treatment of broker accounting, fees, or cross-currency conversion conventions.

Key ideas

  • Currency conversion depends on which currency the trader must sell and which they need to buy.
  • Converting a yen loss to dollars involves selling dollars for yen at the USD/JPY bid.
  • For other currency pairs, trace the conversion direction before choosing bid or ask.
  • When a spread applies, the two quote sides can produce different conversion outcomes.

Tags

ForexExecution
Full text
# Trying to understand how to convert profit to home currency


# Trying to understand how to convert profit to home currency












I'm looking at example 2 here:

http://fxtrade.oanda.ca/analysis/profit-calculator/how

```
You see that the rate for USD/JPY is 115.00/05 and decide to buy 10,000 USD. 
Your trade is executed at 115.05.
10,000 USD*115.05= 1,150,500 JPY
You bought 10,000 USD and sold 1,150,500 JPY.
The market rate of USD/JPY falls to 114.45/50. 
You decide to sell back 10,000 USD at 114.45.
10,000 USD*114.45=1,144,500 JPY
You bought 10,000 USD for 1,150,500 JPY and sold 10,000 USD back for 1,144,500 JPY. 
The difference is your loss and is calculated as follows: 
1,150,500-1,144,500= 6,000 JPY. 
Note that your loss is in JPY and must be converted back to dollars.
To calculate this amount in USD:
6,000 JPY/ 114.45 = $52.42 USD or 
    6,000 *1/114.45=$52.42
```

For the 6000 JPY loss we are dividing by the market bid, correct? What I don't quite understand is why it's not the ask. I verified this is how it works in fxtrade, but I just don't quite understand why. Aren't you trying to buy back USD and sell JPY? To do that, don't you need to use the market sale/ask price of USD/JPY?

Also, I tried this with a different type of pair, like EUR_AUD and AUD_USD. Let's say I end up with a profit of 1000 AUD. There, I divide by 1 / (ask price of the AUD_USD) .. Correct? I'm not sure I understand why this one is different, ie, why it's the market ASK now and not the BID price for AUD_USD

Does anyone have an explanation or links that might explain this further? Thanks!!

## Answer by Blaze (score 1)

https://quant.stackexchange.com/a/21374

Ah, it was a dumb question. The 6000 JPY is a loss so I have to buy the JPY back, so I'm selling the USD/JPY and using the bid price.

## Answer by arodrisa (score 0)

https://quant.stackexchange.com/a/21369

In this case, they are not considering bid or ask (reading the original webpage). But they are considering the actual FX rate.

They are converting the losses with the ACTUAL rate, that's why they are taking 114.5.

If there is a bid ask spread, and you want to exchange your currency, there is a trick. They will always take the most advantageous rate, so just calculate both, and you will obtain the worse.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.