Calculation and mechanics
An account at Interactive Brokers can hold positions in different currencies. A gain of 500 USD and a loss of 300 EUR can only be evaluated together once both are converted into the same currency. This common currency is the base currency.
Which exchange rate is used for the conversion affects the result. One option is the rate of the day on which a gain or loss was realized. If the current rate is used instead, past results also change afterwards with every currency move. Over several years and with strong moves, for example of the US dollar against the Swiss franc, the difference can be considerable.
The exchange rate in the formula states how many units of the base currency equal one unit of the trading currency. At 1 USD = 0.92 CHF, 500 USD therefore make 460 CHF. If the rate is quoted the other way round, you divide instead of multiply.
The currency risk of open positions is a separate matter. A US stock can rise in dollars and still lose value in francs if the dollar falls against the franc at the same time.
Amount in base currency = amount in trading currency x exchange rate (base currency per unit of trading currency)
Distinction
The trading currency is the currency in which an instrument is quoted and settled. The base currency instead is the currency in which the whole evaluation is brought together. Amounts such as Expectancy and the Max drawdown are therefore stated in the base currency.
Ratios such as the Profit factor have no unit, but with mixed currencies they are still not independent of the exchange rate. If, for example, the gains are mainly in USD and the losses in EUR, every conversion rate shifts the ratio of gains to losses.
Related terms
- Realized P&L and total return (Realized profit, total return)
- Expectancy (Average result per trade, expected value)
- Profit factor (PF)
- Return Relative to a Benchmark (Relative performance, vs SPY, vs ACWI)
All market and analytical information is provided for educational and analytical purposes only and does not constitute investment advice or a trading recommendation.