Author Topic: Effect of underlying currency vs. trading currency  (Read 617 times)

R. Jofer

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Effect of underlying currency vs. trading currency
« on: March 12, 2018, 06:21:17 PM »
Hey all,

Newbie here! I've been trying to wrap my head around this but I'm not really sure I got it right and would appreciate some help :) As far as I understood, when buying the same index fund (VUSA, for example) it doesn't really matter which currency I buy it in because the underlying value of the assets is in USD and the % gains listed will account for this. So, for example, the following are the plots of VUSA when traded in CHF (SIX) and EUR (Euronext), from Swissquote:

https://www.dropbox.com/s/216e6n3zfg96k7s/Screenshot%202018-03-12%2023.54.36.png?dl=0


This seems to fit with what I assumed. If I bought 10000 CHF in 10/05/2017 these would be worth 11238 CHF in 23/01/2018 (12.38% gains). This would be roughly the same as buying the same value in EUR (9124 in 10/05/2017), which would grow 4.76% to 9558. This would be 11258 CHF in the exchange rate of 23/01/2018.

Now here is the part I don't understand: from 10/05/2017 to 23/01/2018 the CHF grew ~12% on the USD (from 1.088 to 0.9566) and the EUR grew ~4.8% (from 0.8538 to 0.8123). Doesn't this mean that, as the underlying assets are in USD and depreciated more in relation to CHF than to USD, I should get more money in the end if I bought in CHF? Am I missing something here or looking at this completely wrong?

And while we're at it there is something else I don't understand :V For 10-05-2017, we have 1 USD = 1.088 CHF and 1 USD = 0.85388 EUR. This should mean, I suppose, that 1 EUR = 1.088/0.85388 = 1.274 CHF, but for that date the listed value is 1 EUR = 1.096 CHF... Does the rate between one currency and two others have no relation to the rate between these two others?

bwall

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Re: Effect of underlying currency vs. trading currency
« Reply #1 on: March 12, 2018, 07:20:48 PM »
Since currencies are tradable, if the underlying assets of an index fund are outside that currency, it's a wash.

I'm not familiar with your fund example, but if it's designed to track the performance on a basket of American stocks, then the currency you purchase it in is irrelevant, unless of course, you live in the country where you can spend that currency. In which case you can take advantage of your currency's depreciation if that happens.

For example, if you buy aapl on a european exchange, your purchase and sales price will be expressed in euros, but will track the price of Apple stock. Any rise or fall in the USD will be at your risk.

If you want to go the other way around, and purchase a Swiss stock, like, say, Nestle or UBS, on the NYSE, the expenses and profits and quarterly reports are reported and prepared in Switzerland. The exchange rate will be reflected in the stock price on the NYSE.

Here's the problem that you will run into: Most companies outside the USA are international and therefore earn the majority of their profits outside their own country. So, it's hard to take advantage of any currency appreciation or depreciation.

And, to answer the second question; yes, all currencies have 'crosses', meaning that if you know the EUR/USD exchange rate and the EUR/CHF exchange rate, with simple math you can calculate the USD/CHF exchange rate (9th grade algebra? Dunno.)

R. Jofer

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Re: Effect of underlying currency vs. trading currency
« Reply #2 on: March 13, 2018, 02:11:32 AM »
Thanks for you reply! Regarding the silly exchange rates question, never mind, somehow I was getting the wrong rates from the website I was using. Double checked on xe.com and everything fits ;)

In my case I use both CHF or EUR on a daily basis (I live in France but work in Switzerland). So, because if the USD gains or loses value against one currency it will do the same against another (unless the other two change between themselves), it doesn't really make a difference if I buy it in CHF or EUR. Did I get that right?


bwall

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Re: Effect of underlying currency vs. trading currency
« Reply #3 on: March 13, 2018, 07:47:19 AM »
My wife's family lives in southern Germany and some in her family also work in Switzerland. I always wondered if happens on the French side as well. I guess so!

To confirm: If you are investing in the American stock market, then for you it doesn't matter if you do this in a EUR or CHF account. Pick the currency that is most convenient for you; i.e. tax rates, exchange rates, lower fees, etc. Your return will be the same as if invested in USD on the stock exchange in the USA.

Not to beat a dead horse, but in a simplified example, if the NYSE goes up 20%, but the USD drop 4% against the EUR and 6% against the CHF, then the returns in a EUR denominated account will be 16%  and in a CHF account would be 14%. This is the same as if you got 20% on the NYSE, but then 'lost' the corresponding amount on when changing into EUR or CHF. Conversely, if your NYSE investment goes up 20% and the USD appreciated 7% against the EUR and 11% against the CHF, your gains will be 27% or 31%, depending on if you had a EUR or CHF account.

Investing in American stocks is a way of purchasing assists in the USA without going to the USA.

R. Jofer

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Re: Effect of underlying currency vs. trading currency
« Reply #4 on: March 13, 2018, 03:39:45 PM »
It's clear now :) Thanks a lot!