Hong Life CalculatorsUnderstanding the foreign stock return in your currency — concept and principle
When you buy a share listed abroad, your result depends on two prices: the share price in its own currency and the exchange rate between that currency and yours. This calculator shows your total return in your home currency and splits the profit into the part earned by the stock and the part earned (or lost) through the exchange rate. It is useful for anyone holding US, Japanese or European shares from another country.
How it is calculated
- Cost = buy price × shares × exchange rate when bought.
- Value now = current price × shares × exchange rate now.
- Return in your currency = value ÷ cost − 1 = (1 + stock return) × (1 + FX return) − 1.
- From the stock = (current price − buy price) × shares × old rate.
- From the exchange rate = current price × shares × (new rate − old rate).
The exchange rate is entered as units of your currency per 1 unit of the foreign currency, so a higher number means the foreign currency has strengthened.
The principle
Returns multiply rather than add. Your foreign-currency value grows by the stock return, and each foreign unit is then worth more or less in your money by the FX return. Multiplying the two growth factors gives the total, which is slightly more than the simple sum because the stock gain itself is also revalued by the currency move (a cross term). In the profit split, that cross term is placed in the FX part, since it is measured at the current price.
Worked example
- Inputs: bought at 150, now 180, 20 shares, rate 1,300 then and 1,400 now.
- Cost = 150 × 20 × 1,300 = 3,900,000. Value = 180 × 20 × 1,400 = 5,040,000.
- Stock return = 180 ÷ 150 − 1 = 20%. FX return = 1,400 ÷ 1,300 − 1 = 7.69%.
- Total = 1.20 × 1.0769 − 1 = 29.23%, a profit of 1,140,000.
- From the stock: 30 × 20 × 1,300 = 780,000. From the rate: 180 × 20 × 100 = 360,000. Together 1,140,000.
How to read the result
If the FX part is large, much of your result came from the currency, which can reverse just as quickly as it arrived. A rising stock can still lose money in your currency if your currency strengthens enough; check both parts before deciding whether to hold, hedge or take profits.
Common mistakes
- Adding the two percentages (20% + 7.69% = 27.69%) instead of compounding them.
- Entering the rate the wrong way round (foreign per home instead of home per foreign).
- Ignoring dividends, withholding tax, broker fees and the spread on currency conversion.
Frequently asked questions
Why is my return higher than the stock's return?
Because the foreign currency rose against yours; each share is worth more when converted back.
Does the exchange rate part get taxed?
In many countries the gain is computed in local currency, so the currency effect is included in the taxable gain. Check your local rules.
What is currency hedging?
Using forwards or hedged funds to remove most of the FX part, leaving mainly the stock return, usually at a cost.
Sources: CFA Institute, CFA Program Curriculum, Currency Management: domestic-currency return = (1 + foreign-currency return)(1 + currency return) − 1.