Currency conversion on an account

An account has one currency and a catalog has many. A position in an instrument quoted in Japanese yen produces a result in yen, a position in a German listed share produces a result in euro, and neither can be added to a balance denominated in something else without being converted first. Conversion is therefore not an occasional event on a multi market account. It is happening constantly, on several figures at once, and most of it is invisible because the platform performs it before displaying anything.

YAL accounts may be denominated in USD, EUR, AED, and the instrument catalog spans many more currencies than that, so the question applies to most accounts rather than to unusual ones.

Which figures are converted 

Four separate figures pass through a conversion, and they do not all use the same rate at the same moment, which is the source of most reconciliation puzzles.

• The unrealised result on an open position, converted continuously at the prevailing rate so that the account's equity is expressed in one currency at all times.
• The realised result when a position closes, converted once at the rate prevailing at that moment and posted to the balance.
• The margin held against the position, converted continuously, so the amount held moves with the exchange rate even when the position has not moved.
• Commission and financing entries, converted at the moment each is posted.

Because the unrealised result is converted continuously and the realised one is converted once, a position's contribution to equity can change slightly at the moment it closes without the market having moved. Nothing has been charged. A figure that was being restated at every tick was fixed at a rate.

The exchange rate as a second variable 

A position in an instrument quoted in a foreign currency carries two exposures rather than one. The instrument can move, and the currency it is quoted in can move against the account currency. The two are independent, so a correct view on the instrument can be diluted or enlarged by something that had nothing to do with it.

The last row is the whole of the point. Three identical positions, three identical price movements, three different amounts arriving in the balance. The variable is a market the position was never opened in.

The rate that is used 

Firms convert at their own prevailing rate for the pair concerned, and that rate is a two way price like any other, so a conversion crosses a spread. Some firms apply a stated percentage on top of the market rate for conversions, which is disclosed as a conversion charge rather than being hidden in the rate. Others convert at the mid rate and take nothing. Which applies is stated in the firm's charges schedule.

Where the pair required is not one the firm quotes directly, the conversion is performed through an intermediate currency, and each leg of that route crosses a spread. This is why conversions between two currencies that are each commonly quoted against the US dollar, but rarely against each other, can be more expensive than either leg suggests.

Reconciling a statement 

A detailed statement shows both the instrument currency amount and the account currency amount for each entry, together with the rate applied. Reconciling a position against a calculation done from a chart requires all three, because a calculation in the instrument's own currency will never match a balance denominated in another one and the difference is not an error.

The most common reconciliation failure is comparing an unrealised figure taken from the platform during the day against a realised figure on the statement. The first was converted at a rate that no longer applies and the second at the rate at closing. Where the two differ by a fraction of a percent and the instrument is quoted in a foreign currency, the exchange rate accounts for it.

A conversion is not a charge 

The distinction is worth holding because the two appear adjacent on a statement. A conversion restates an amount in another unit and can move the figure in either direction, since an exchange rate moves in both. A charge is a deduction and moves it in one. Where a firm applies a spread or a stated percentage to the conversion, that portion is a charge and is disclosed separately from the rate itself.

The practical consequence is that a converted result being lower than a hand calculation is not evidence of a fee. It is evidence of a rate, and the rate is printed on the statement alongside the amount so the two can be separated.