Currency Effects On A Multi-Currency Book

You buy a German industrial stock. It goes up 6 percent in euros over the quarter, which sounds like a solid trade. But your fund reports P&L in dollars, and over the same quarter the euro fell 4 percent against the dollar. Your actual dollar return is nowhere near 6 percent — and if you don't separate the local-currency stock move from the exchange-rate move, you'll misjudge whether your stock-picking was any good.

The split

Total return in your home currency is approximately the local-currency return plus the currency return, plus a small cross term that's usually negligible for normal-sized moves:

$$r_{\text{USD}} \approx r_{\text{local}} + r_{\text{FX}}$$

In words: what you made in dollars is roughly what the stock did in its own currency, plus or minus what that currency did against the dollar. The exact version multiplies $(1+r_{\text{local}})(1+r_{\text{FX}})$ rather than adds, but for moves under 10 percent or so the sum is close enough for daily attribution.

Worked example

You hold €2,000,000 of the German stock. At quarter start, EUR/USD is 1.10, so the position is worth $2{,}000{,}000 \times 1.10 = 2{,}200{,}000$, i.e. $2.2m.

The stock rises 6 percent in euros, to €2,120,000. Over the same period EUR/USD falls to 1.056, a decline of about 4 percent.

• Local-currency P&L: $(2{,}120{,}000 - 2{,}000{,}000) \times 1.10 = 132{,}000$, valued at the starting exchange rate — about $132,000. This isolates what the stock pick contributed.
• Currency P&L: the euro exposure itself lost value as EUR/USD fell. Using the ending euro amount, $2{,}120{,}000 \times (1.056 - 1.10) = -93{,}280$, about -$93,300.
• Total dollar P&L: $2{,}120{,}000 \times 1.056 - 2{,}200{,}000 = 38{,}720$, about $38,700.

The stock call was worth roughly $132,000. The currency the position happened to be denominated in took back $93,300 of it. A manager who only looks at the $38,700 total might conclude the position was a mediocre idea; splitting it shows the idea itself was strong and the drag was purely FX.

What this means for decisions

If currency P&L is consistently large relative to local P&L across a foreign book, you're running an implicit macro FX bet you may not have intended to take, on top of whatever equity view you actually have — and it deserves its own decision about whether to hedge it, not a shrug. This split is also what tells you whether a currency hedge is even worth its cost: if the local-currency P&L is where your edge lives, hedging the FX leg out lets that edge show up cleanly instead of being buried in exchange-rate noise.