Trading in International Currencies at Interactive Brokers

[fusiforme]

I have never traded Forex and only began trading in stocks denominated in foreign currencies this year in my IB account.

The majority of these trades have been in stocks denominated in CAD, and my base currency is in USD. I have been buying these stocks using the IB margin loan.

I have not been able to get clarity on a number of issues from IB customer service, so if there is a trader here who has experience with this I'd appreciate clarification on a few questions.

I think I understand the process clearly except the manual currency conversion needed post-sale. At first I thought the currency conversion happened automatically upon sale because looking at my statement after I sale I noticed I would see P/L for the stock, and also P/L listed under CAD. I thought the dollar amount listed in the CAD column represented my profit or loss on the currency transaction, shown in USD, after the stock was sold. But apparently this is not the case?

When I look under "Forex" in my statement I see a list of a number of Canadian stocks. Some of these appear to be positions in stocks I still have open. others are stocks I have sold in the past. I cannot quite figure out what I am looking at here because it shows a cost basis in USD which is positive but a "current value' in USD in excess of the cost basis, which is negative. All of these are stocks I originally sold for a profit, and usually when I looked at my weekly statement it also showed a profit in the "CAD" column. However here in the Forex section of my statement every number in the "unrealized P/L" column is negative.

I was told I need to manually convert the currency for each stock sold, or the amount will just remain in my account in CAD. However, the process for doing this in IB does not seem clear. Although I see that list of individual sold stocks under "Forex" on my statement, there doesn't seem to be any corresponding function on the platform which allows me to select those sold positions and covert the amounts back to USD.

In the account 'REAL FX Balance" section there is an option "close currency balance." But I have not been able to get a clear explanation of what happens if I do this. If I select this option and look at the amounts in the window that pops up, it appears to be set up to sell a much higher amount of CAD than the amount of stocks I have sold, and I don't know how this will effect the margin loan for the amount of CAD I am still borrowing.

If I am simply right click on CAD and select "close currency balance" every time I make a sale of a stock denominated in CAD, will this convert all CAD profits back to USD without causing any problems?

My apologies if this post is difficult to follow. I have had a little trouble in knowing what questions to ask and how exactly to phrase them because at the moment I am totally baffled about how this whole conversion thing works and the IB platform does not seem very transparent on this point.

My hope is someone who has experience doing this kind of trading for a long time will be able to clear up these points for me so I understand what I am looking at and what I need to do.

Thanks for your help!

 

[traider]

I have never traded Forex and only began trading in stocks denominated in foreign currencies this year in my IB account.

The majority of these trades have been in stocks denominated in CAD, and my base currency is in USD. I have been buying these stocks using the IB margin loan.

I have not been able to get clarity on a number of issues from IB customer service, so if there is a trader here who has experience with this I'd appreciate clarification on a few questions.

I think I understand the process clearly except the manual currency conversion needed post-sale. At first I thought the currency conversion happened automatically upon sale because looking at my statement after I sale I noticed I would see P/L for the stock, and also P/L listed under CAD. I thought the dollar amount listed in the CAD column represented my profit or loss on the currency transaction, shown in USD, after the stock was sold. But apparently this is not the case?

When I look under "Forex" in my statement I see a list of a number of Canadian stocks. Some of these appear to be positions in stocks I still have open. others are stocks I have sold in the past. I cannot quite figure out what I am looking at here because it shows a cost basis in USD which is positive but a "current value' in USD in excess of the cost basis, which is negative. All of these are stocks I originally sold for a profit, and usually when I looked at my weekly statement it also showed a profit in the "CAD" column. However here in the Forex section of my statement every number in the "unrealized P/L" column is negative.

I was told I need to manually convert the currency for each stock sold, or the amount will just remain in my account in CAD. However, the process for doing this in IB does not seem clear. Although I see that list of individual sold stocks under "Forex" on my statement, there doesn't seem to be any corresponding function on the platform which allows me to select those sold positions and covert the amounts back to USD.

In the account 'REAL FX Balance" section there is an option "close currency balance." But I have not been able to get a clear explanation of what happens if I do this. If I select this option and look at the amounts in the window that pops up, it appears to be set up to sell a much higher amount of CAD than the amount of stocks I have sold, and I don't know how this will effect the margin loan for the amount of CAD I am still borrowing.

If I am simply right click on CAD and select "close currency balance" every time I make a sale of a stock denominated in CAD, will this convert all CAD profits back to USD without causing any problems?

My apologies if this post is difficult to follow. I have had a little trouble in knowing what questions to ask and how exactly to phrase them because at the moment I am totally baffled about how this whole conversion thing works and the IB platform does not seem very transparent on this point.

My hope is someone who has experience doing this kind of trading for a long time will be able to clear up these points for me so I understand what I am looking at and what I need to do.

Thanks for your help!

You should try to estimate how much CAD you need for purchases, exchange a bit more won't hurt if you are consistently buying CAD stocks. Trading more than 25K or 20K will allow you to do the trade on IDEALPRO which gives you an excellent conversion rate vs if you were to do a small amount everytime you trade. However note that you will be holding CAD and you might suffer from FX losses if your base currency is USD.

Remember to choose the trade as a conversion instead of a virtual currency trade when prompted by TWS.

Here are the keywords to search and read up on, google them along with IB

FXCONV
IDEALPRO
Virtual FX Position

 

[Overnight]

...
I have not been able to get clarity on a number of issues from IB customer service, so if there is a trader here who has experience with this I'd appreciate clarification on a few questions.

...I have had a little trouble in knowing what questions to ask and how exactly to phrase them because at the moment I am totally baffled about how this whole conversion thing works and the IB platform does not seem very transparent on this point.

My hope is someone who has experience doing this kind of trading for a long time will be able to clear up these points for me so I understand what I am looking at and what I need to do.

Thanks for your help!

Incredible. IB, you owe it to your clients to answer this. Non-answers are unacceptable.

 

[MoreLeverage]

do you want FX risk or not?

1. If you want to be long CAD and long Canadian stocks, convert some USD to CAD via IdealPro and use that for trading. Your PNL will accumulate in CAD, which you can swap back to USD periodically if you want to cash it out. Keep your fingers cross that CAD appreciates against USD, as well as that your stocks go up.

2. If you want to be hedged and still long these Canadian stocks and you tend to hold positions for relatively short periods, you should not bother to do any currency conversion. When you buy a CAD stock, you'll borrow the CAD from IB and pay a margin rate on that (2-3% or whatever, based on how much and current Canadian interest rates). As soon as you sell the stock, the loan is repaid and interest stops.

3. If you want to be hedged and you hold positions for longer times, you should convert a fixed amount into CAD, buy your stocks, and then take a short position in Canadian cash or the Canadian FX future to offset the amount of USD worth you converted. The fixed costs of conversion or occasionally rolling the futures (for larger balances) are cheaper than paying the Canadian margin interest if you want to hold for a longer period. Last I checked it was a couple months was the indifference / breakeven period and you would do #3 if you held longer and #2 if you held shorter.

Incredible. IB, you owe it to your clients to answer this. Non-answers are unacceptable.

Maybe IB customers should figure out how to manage their own FX risk before they go off trading foreign listed stocks. It's not IB's problem - they provide all the tools and reports, and OP is just not familiar with them.

 

[fusiforme]

Thanks to everyone who has replied so far.

I am familiar with the different options IB offers for making international trades which are detailed here by some posters. (Buy the currency beforehand and so on...)

However, for better or worse, I already chose the margin loan option. I'm not sure if there is some way I can change this, remove the margin loan and just go in and purchase the currency now?

It would be helpful if I could get a reply here from any trader here who has used the margin loan option for trading a number of securities in a different currency, because the questions I am asking here relate to currency conversion after closing positions I initiated through the IB margin loan option.

These are things I have not been able to get explained clearly by IB customer service, which I am seeking clarity about here:

1) when I close positions, and look at my statement, two amounts are listed. P/L for the stock. but also P/L for the currency (CAD). If the currency is not automatically converted back to USD when a trade is closed, what is the significance of this number I am looking at on my statements? For example, I recently closed two trades for what was essentially break even, but under CAD on my statement a negative amount of several hundred dollars is listed.

2) What exactly happens if I select "close currency balance" in account management? I still have many stocks denominated in CAD in my account. When I select "close currency balance" will IB only convert back to USD the amount of CAD in my account from previously closed positions? Or could it have some unwanted effect relating to my margin loan for currently open positions?

When I experiment and select "close currency balance" IB automatically pops up another windows which shows a very large amount of money which I can transact on. But right now I do not know what that sum of money refers to. Does it only compromise cash in CAD held in my account from previously closed positions?

My impression is it does not. I also have one position denominated in JPY in my account. If I choose "close currency balance" for that position, a window pops up showing the exact monetary value of that position and offering to convert it. But my understanding is I am borrowing that amount in JPY from IB to hold that position in my account. So why do I even have the option of converting it to USD now when the position is still open?

Also one thing I want to double check to make sure I understand it: if I purchase foreign currency beforehand, I am long that currency against the USD for all positions in that currency. But it looks like the margin loan is actually the opposite? It seems that because I used the margin loan am actually long USD against CAD for all profits or losses on those positions, so I am not getting CAD exposure?

If anyone can give me more clarity on these issues I'd appreciate it. Thanks.

 

[traider]

Here is a very simple example

You buy $100 of CAD stock.

You owe $100 CAD because you did not have the currency. This is expensive over time because interest rates charged is quite high for retail borrowing.

Say stock drops to $80. You held for a year at 5% interest. You sell stock at $80

Now you have -$20 (loss) and roughly -$5 (interest) CAD on your pnl. When your position is closed, you still have a net loss of 25 CAD.

In my opinion it is much better to purchase CAD currency if you plan to trade CAD stocks long term or hold them.

 

[fusiforme]

Ok--my final post on this topic. Hope it may be of use to someone who wants to trade international stocks on IB but does not have previous experience with Forex.

After reading all of the posts here again and experimenting more in IB trader workstation, I reached the conclusion there was no need for me to have a margin loan at all. So I decided to buy enough of each foreign currency to cover every foreign stock currently in my portfolio.

Once I did that and looked again at the "real FX balances window" I think I got an answer to one of my biggest questions: what exactly is happening when you choose "close currency balance" in the IB account window?

If I understand correctly, all that happens when you close the currency balance is that it buys enough of the foreign currency to eliminate your margin loan.

So it seems advisable for any trader who has enough cash to cover his purchase to immediately close his currency balance after purchasing a foreign stock on margin loan.

If I understand correctly, "close currency balance" accomplishes exactly the same thing as purchasing the currency beforehand--it is just that you are doing it after having already made the stock purchase.

Now that I have more clarity on the way the IB system works I realize I never needed that margin loan at all. I always had enough cash in my account to cover all purchases denominated in foreign currencies, so if I had understood the "close currency balance" option earlier, I could have saved myself a lot of margin fees.

Unfortunately this is the one piece of the puzzle that was missing for me when I began buying international stocks.

Because my P/L statements from IB always showed a P/L on currency as well as a P/L on any stocks when I sold them, I assumed that when I closed positions the currency was being converted automatically back to USD. When you sell a stock denominated in a foreign currency the IB platform does not ask you if you want to covert the sum back to your base currency--nor does any informational message display that advises the trader of a need for conversion.

The trader needs to be aware of this already and then needs to go to the "management" window in TWS and do all of this manually in the section "real FX balance." Because I was always buying more CAD stocks than I sold, I never actually had a positive CAD balance show up in my account, which would have alerted me to the fact that CAD from closed positions was still sitting in my account unconverted.


Anyway, I hope this thread may help someone starting to trade international stocks navigate the IB platform more knowledgeably and avoid unnecessary margin fees.

Thanks to everyone who contributed their advice and knowledge to this thread!

 

[lovethetrade]

Thanks to everyone who contributed their advice and knowledge to this thread!

One other bit of advice, try and be more efficient in your communication, most people dont have time to read a book each time they want to give you a response. I stopped reading this thread after the 3rd paragraph of your opening post.

 

[eastern_warrior]

One other bit of advice, try and be more efficient in your communication, most people dont have time to read a book each time they want to give you a response. I stopped reading this thread after the 3rd paragraph of your opening post.

LOL- true.

My rule of thumb:
If I'm day trading, I don't convert. No reason, if profits/losses reach a threshold, I convert back.

If I hold overnight or longer term. I may take the loan if I like the currency play or just want to hedge the currency risk relative to USD.