Measuring Foreign Stock Returns in an Investor’s Home Currency
Summary
The document explains how to calculate the gain on a foreign-currency investment from the perspective of an investor whose home currency differs from the asset’s trading currency. The relevant comparison is between the home-currency amount originally paid and the home-currency value received at the later exchange rate. In the example, the initial USD purchase is translated at the starting rate, while the later stock value is translated at the ending rate; comparing both amounts in euros captures the currency effect.
The answer also describes representing the initial cash currency position and the stock as separate entries in a portfolio tracker. Their individual gains or losses combine to reflect the total home-currency result, even if the displayed portfolio value is inflated by counting both entries. This is an accounting workaround specific to the described tracker behavior, not a universal platform procedure. The example emphasizes that an asset’s local-currency gain and the investor’s overall home-currency gain can differ because exchange rates change.
Key ideas
- Measure investment gains in the investor’s home currency using the actual initial cost and later proceeds.
- Translate the purchase at the initial exchange rate and the later asset value at the later rate.
- Currency movements can offset or amplify the underlying asset’s local-currency return.
- Tracking the cash currency and stock separately can capture their combined gain in the described portfolio tool.
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Full text
# Is "time value of currency" to be accounted for in returns calculation? # Is "time value of currency" to be accounted for in returns calculation? A simple question: When exchanging currency in order to finance an investment, is it standard/best practice to adjusted for exchange rates when calculating the NPL of that investment? For example: I, a European, purchase 100 USD of american securities on Day 0, costing me 90 EUR @ a rate of 0.9 USD/EUR. At Day X, my security has seen growth to a market value of 120 USD, however today, the exchange rate is 0.8 USD/EUR. Is my return: - (120 * 0.8) - (100 * 0.8) = 16 EUR OR - (120 * 0.8) - (100 * 0.9) = 6 EUR My intuition tells me calculation 2 is correct since I invested 90 EUR, and at Day X I have USD equivalence to 96 EUR? However, Yahoo Finance for example does not make these adjustments when calculating the Total Gain of portfolio. ## Answer by AllBlooming (score 3, accepted) https://quant.stackexchange.com/a/54645 Your calculation 2 is the relevant metric since that is what you actually paid, and later received, both measured in your home currency EUR. If you want to track it in Yahoo Finance, try adding two investments to your portfolio: - The 100 USD bought at day 0 at EUR 90 and - the US stock you bought at day 0 for EUR 90. With both the USD position and the stock entered into your portfolio, Yahoo Finance will now track both of these in your home currency EUR. The total portfolio value (EUR 180 at day 0) will be off, but the gain/loss will be accurate, and here's why. At day X, Yahoo Finance will show - The value of your 100 USD investment at day X as EUR 80, a €10 loss. - Your stock will be shown as EUR 96, which is the stock's current price of USD 120 converted (by YF) to EUR at the current exchange rate, i.e. as EUR 96. This will show as a €16 gain, i.e. the USD 20 gain the stock made in USD, converted to EUR at today's (day X's) exchange rate. Here's how you can make sense of it: You made a €16 gain on the stock, and a €10 loss on your USD investment, which leaves you at a total gain of €6. Yahoo Finance will show you these €6 as the portfolio's total gain - just take the total portfolio value with a grain of salt because we added the USD position as a pure "helper" item.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.