Currency Risk when buying foreign stocks

L

lyto1

Hello,

I am trying to understand what is happening with the currency risk and fees when I buy a stock in a foreign currency so I have some questions. Broker is IB. For example: my base currency is EUR and I have only Euros in my account and I want to buy a stock in USD. I opened a position as a test:

GM LONG AT MARKET 3 x 38,05$ = 114,15 USD

The fee is 1,95 USD. EURUSD at this point 1,08518.

Question 1: So 1,95 USD (1,80 EUR) will be decucted immediately from my account right?

Question 2: At the same time I have a short position of 114,15 USD (or long EURUSD) so I have no currency risk in my GM position? Lets assume my GM position in USD stays the same at 38,05$. If EUR gets stronger (consequently my GM position converted in EUR gets lower) it will be compensated by the USD short position.

Question 3: So far I only have to pay the overnight interest on my USD short position right?

Thank you
 
Q1: correct. The commission will be charged when the order is filled.
Q2: Your USD cash short position will be 114.15 + 1.95 = 116.10 USD. The commission will not be converted by IB to your base (i.e EUR) currency.
Q3: Correct.
 
Great, thank you.

Now i closed my position with a loss. Closed at 3 x 35,51USD = 109,53USD
So I have a loss of: 114,15USD 109,53USD = 4,62 USD

The position is closed, but my cash balance is left with -8,52USD.
I suppose this is -1,95USD + -1,95USD + -4,62USD = -8,52USD

So I have no other option than manually converting this loan back into euros and paying additional fees?

What happens if I close my position with a win? Do I end up with a positive USD cash balance that I have to convert back to Euros?

thank you
 
lyto1 said:
The position is closed, but my cash balance is left with -8,52USD.
I suppose this is -1,95USD + -1,95USD + -4,62USD = -8,52USD
More...
Correct. IB charges commission for each trade. So you pay when you open (buy) and when you close (sell) the position.
lyto1 said:
So I have no other option than manually converting this loan back into euros and paying additional fees?
More...
Correct. Your IB account is a multi-currency account and IB does not do any currency conversion automatically. It is up to you to decide at what point you want to make conversions from one currency into another.
lyto1 said:
What happens if I close my position with a win? Do I end up with a positive USD cash balance that I have to convert back to Euros?
More...
Correct. If you want that cash to be in EUR you'll have to convert it yourself. Or you might decide to keep it in USD and use it for your next USD-denominated trade.
 
Last edited:
Ok thank you. I thought if IB lends me the USD cash, it will close the cash position fully when I sell my GM position, but thats not the case.

So sometimes it is really better as you say to keep the remaining USD cash balance for the next trade or accumulate some USD profit/loss and then convert back because of the conversion fees.
 
lyto1 said:
So sometimes it is really better as you say to keep the remaining USD cash balance for the next trade or accumulate some USD profit/loss and then convert back because of the conversion fees.
More...
Indeed. That's why I usually don't bother to convert cash positions. For me there would be two possible reasons to convert cash from one currency into another:
(i) if the debit interest on a cash position becomes larger than the cost of the transaction, or
(ii) if I know that I will not use that foreign cash any longer for future trades.
 
You must log in or register to reply here.
Back
Top