How FX Movements Affect a Foreign-Currency Futures Investor’s P&L
Summary
The document explains how exchange-rate changes affect the realized return of a euro-based investor trading US Treasury futures without delivery. Its answer treats futures P&L as the daily gains or losses credited to a USD account. When the trade is closed, the investor converts that USD balance into euros; the FX rate affects conversion of the accumulated P&L, rather than revaluing the full contract notional as though it were an outright asset holding.
It distinguishes this economic accounting from a possible tax calculation for an individual resident in a European country. Taxable gains may be computed by translating buy and sell values at their respective date-specific exchange rates, so taxable and realized economic profit can differ. The explanation is general and flags country-specific tax treatment as a matter for a qualified adviser; it does not detail futures margin accounting or all possible institutional FX policies.
Key ideas
- Futures P&L accumulates as a currency balance through daily gains and losses.
- A euro-based investor converts the resulting USD balance using the exchange rate at conversion.
- Under the described treatment, FX exposure applies to the position’s P&L rather than its full notional.
- Tax rules may calculate gains using FX rates from separate transaction dates, producing a different taxable amount.
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# FX-Effect on (foreign) interest rate future # FX-Effect on (foreign) interest rate future this is not (directly) a quantitative question but since there are so many knowledgeable people here and I've found so many helpful discussions in the past, I ask it nonetheless (I haven't found an existing thread on this). Say, a euro based investor - who, in the end, converts all proceeds back in euros - invests in US treasury futures and later sells them (no physical delivery involved): which part of the p&l of this transaction is affected by the change of the eurusd exchange rate? I got two contradictory "answers" looking it up and asking people who deal with the valuation of financial products. One was, the whole notional (number of contracts times price times contract size) is affected by the change of the fx cross rate between opening and closing of the position. In this case the fx-effect can easily outweigh the interest rate effect on this position and a separate fx hedge might be necessary. The other was, only the change in the market value of the position in USD is subject to changes in the fx rate. In this case, as long as my opinion on the direction of interest rates is correct, I will end up with a profit in euros but which might increase or decrease depending on the prevailing fx rate. As I understand it, the latter is what a document of the CME points to (https://www.cmegroup.com/trading/equity-index/intl-investing-currency-risk-in-equity-portfolios.html). However, it refers to equity futures instead of interest rate futures. Can anyone shed some light on this issue? All help is very much appreciated. Many thanks. ## Answer by nbbo2 (score 1, accepted) https://quant.stackexchange.com/a/79044 The CMEGroup answer is closer to the truth, I believe. Their answers are written by people who understand how futures really work. The futures trading account of the european investor will accumulate a (positive or negative) USD balance as a result of daily P&L on the future (equity, fixed income or commodity future, it does not matter). Once the trade is over the investor may wish to convert this USD balance (which represents the USD profit) into EUR at the then-current EURUSD rate. Only the change in market value of the position has to be converted, at the time the investor chooses to do so. However, there may be a complication for an individual who is a tax resident of a European country. In this case, for capital gains purposes the investor will have to first compute his profit in Euros by converting the buy value and sell value of the futures at the two separate FX rates (buy date rate and sell date rate), the difference will represent the taxable capital gain. This will be multiplied by the tax rate to determine the tax the investor must pay. So strangely the taxable profit and the actual profit may be different. However, this is a technicality which needs the attention of a tax advisor for the specific european country involved. (Which I am not. I find international taxation to be a baffling subject). And for a financial institution I believe the CMEGroup answer still applies.
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