Foreign Exchange P&L Attribution for Commodity Forwards
Summary
The document explains how to separate price and currency effects when a commodity forward is denominated in euros but the company reports in dollars. It shows that multiplying the commodity-price change by the exchange-rate change alone misses the separate effects and their interaction. A reliable total daily P&L calculation compares the position's current translated value with its prior translated value; the change can then be decomposed into price, FX, and cross-effect components.
Illustrations show a currency-only move, a commodity-only move, and simultaneous changes, with the last case producing a cross term. A second example calculates profit by translating the purchase value and later market value at their respective EUR/USD rates, yielding a dollar P&L even when price and FX move in opposite directions. The examples are explanatory rather than a complete accounting policy: contract terms, settlement conventions, quantities, and any forward-specific valuation inputs may affect implementation.
Key ideas
- Measure translated P&L by comparing current and prior values in the reporting currency.
- Price movement, FX movement, and their interaction can all contribute to total P&L.
- An FX-only move can create P&L even when the commodity price is unchanged.
- The example's product-of-changes formula omits important components of the attribution.
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Full text
# Forex P&l Attribution on Physical Forward position # Forex P&l Attribution on Physical Forward position Please validate my unrealized Fx P&L calculation on the commodity forward contract e.g. consider i have bought 1 MT of wheat at 300 EURO my financial currency for company is USD. I am using below formula to get attribution . (Market Price - Commodity Price )*(Today FX Rate- Yesterday FX Rate) The above formula is used for daily fx loss and gain on the forward position . But above failed when the market price = commodity price . ## Answer by Nicholas (score 0, accepted) https://quant.stackexchange.com/a/22607 Hope this illustration helps to understand fx effect: Examples: - if px_0 = 100; px_1 = 100; fx_0=1.3; fx_1=1.4 then your total p&l would be only due to Fx: TotalP&L = Px_0 * (Fx_1 - Fx_0) = 100 * (1.4-1.3) = 10 - if px_0 = 100; px_1 = 110; fx_0=1.3; fx_1=1.3 then your total p&l would be only due to Px: TotalP&L = (Px_1-Px_0) * Fx_0 = (110 - 100) * 1.3 = 13 - if px_0 = 100; px_1 = 110; fx_0=1.3; fx_1=1.4 then your total p&l would be both due to Px, Fx and cross-effect: TotalP&L = (Px_1-Px_0) * Fx_0 + P_0 * (Fx_1-Fx_0) + (Px_1-Px_0)*(Fx_1-Fx_0)= (110 - 100) * 1.3 + 100 * (1.4-1.3) + (110-100)*(1.4-1.3)= 13 + 10 + 1 = 26 ## Answer by chjortlund (score 0) https://quant.stackexchange.com/a/15824 You might over think it :-) - Your account is in USD - You buy for 300 EUR wheat and the price now is 320 EUR - the EURUSD is 1.24688 (2. december 2014) at the time you buy - the EURUSD is 1.24347 (now - 11. december 2014) 320 * 1.24347 - 300 * 1.24688 = 23.8464 USD profit
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