Okay, I hope you’re bearing with me for this. Sorry for the somewhat long post.
The numbers in the following spreadsheet are just for the sake of the argument. They aren’t real USD/GBP rates or realistic stock prices.
Here’s what’s going on. In this example, the investor buys stocks for 1000 USD two times over the year. In January and in June. And then he sells everything in December. The stock price went up. And the currency exchange rate stayed the same. This is very simple and straightforward. The return of investment is identical for USD and GBP investors.
In the second table, I am introducing a changing FX rate. The price for GBP also went up here, and it reduces the effective gain for the GBP investor while the USD investor makes a better profit. That’s also not very difficult, that just shows why investments in foreign currencies have that additional FX rate risk.
Accounts in foreign currencies aren’t a new thing in investment. But why might it be interesting for an investor to do that?
So, lets say the investor from example 2 isn’t exchanging back the USD into GBP in December because he doesn’t want to reduce his profit due to the “bad” rate. But he uses the USD in his trading account to buy a different stock for further investing.
So what do you do now. Maybe a year later, he sells that again and the GBP rate this time is in his favor. How should that final calculation look like? Are you going to apply the GBP/USD rate at the time in December when you actually didn’t buy or sell any USD at all? What if he would let the money sit a litte maybe until May before reinvesting? Would you apply the GBP/USD rate at the time of reinvestment even if you didn’t buy USD at that time?
As long as you’re not buying back GBP with your USD, you haven’t realized your gains. Or have you? And this is where national regulations might vary. But whatever applies in your case: you need to at least track the FX rate at the time of reinvestment (in December or May) to know the value in GBP you’ve reinvested. If you don’t, how can you calculate your final profit in a currency that isn’t USD?
And this gets very complex very soon when you’re investing in various stocks, when you’re not selling all shares of a given stock but chunks and if you’re then reinvesting that money in chucks again.