Before you can convert returns from one currency to another, you need to start loading exchange rates to the database.
You can use the Performance Analysis report to convert returns from one base currency to another. The multi-period returns are converted to another currency by :
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retrieving the single-period returns from the database.
- Except for local and system currency returns, these are stored with a base currency equal to the entity base currency.
- Geometrically linking the single-period returns.
- Converting the cumulative return to a cumulative growth rate.
- Determining a currency return for the period.
- Converting the currency return to a currency growth rate for the period.
- Multiplying the cumulative growth rate by the currency growth rate over the period.
- Converting the resulting converted growth rate to a return.
- Annualizing the result as requested.
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The following figure shows an example of currency conversion.
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When you click the Options button in the report profile, the Advanced Options dialog box appears. The options on the Select the Currency tab of the Options dialog box support conversion of returns. These options allow you to perform "on the fly" currency conversion. See the following figure.
The following table describes the options on the Select the Currency tab.
Option | Description |
|---|---|
1. Convert benchmark to portfolio base currency | You can select this option to convert the benchmark specified in the report to the base currency of the portfolio. If a profile contains multiple entities with benchmarks in multiple base currencies, selecting this option converts each benchmark into its corresponding fund's base currency. Otherwise, leave the check box cleared. |
2. Convert each Entity's base currency to: | You can specify an alternate currency to convert the returns and other values to this currency. |
Second Alternate Currency | If the specified First Alternate Currency currency has a start or a stop date, for example, the Euro has a start date of 1/1/99, the Currency Start Date or Currency Stop Date is noted and the Second Alternate Currency box becomes available. |
3. How would you like to fetch your foreign exchange rates? | For handling missing exchange rates. Select the appropriate Fetch option, either the effective date of the report, or X number of days from the effective date. |
4. Override Currency conversion if an entity family member exists? | If this option is selected, the report references an entity with an associated, predefined list of entities with different base currencies, and uses the entity from the list whose base currency matches the target currency of FX-conversion. |
Cross currency process is <ON/OFF> using currency <CURRENCY> | The system displays the cross currency calculation settings you chose at the PACE system level. It identifies whether you enabled cross currency calculations and shows the reference currency used for storing FX rates. These settings are needed for triangulation. For more information, refer to "Enabling Cross Currency Calculations in PACE." |
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The Cross Currency functionality allows you to arrive at the FX rate of a third currency by triangulation. This requires that you load only one reference currency FX rate. This substantially reduces the amount of FX data clients you are required to load because you are not required to load FX rates for every reference currency.
You can use the Select a Currency tab in the report profile to convert the Base Return and Market Value from the fund's base currency to a different currency. For more information, refer to "Setting Up the Report Profile for Triangulation."
You can use this option with all Data Management and Performance reports.
Note: | As a prerequisite to the following setup instructions, it is assumed that you have uploaded cross currency FX rates into the FX rates table. |
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Based on how foreign exchange markets are structured, you can, for example, convert from one currency to a second and then to a third currency. Triangulating back from the third to the first currency is arbitraged (that is, no profit or loss barring transaction cost).
For example, examine the 10 AM rates on 7/27/2007 sourced from the Federal Reserve Bank of New York, as shown in the following table.
From | To | Rate |
|---|---|---|
USD | JPY | 119.14 |
USD | CAD | 1.0504 |
USD | EUR | 0.72833 |
Based on this data, you can see that 1 USD is worth 119.14 Japanese Yen and 1 USD is worth 1.0504 Canadian dollars. Therefore 1 Canadian Dollar equals 119.14/1.0504 = 113.423 Japanese Yen.
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Triangulate from the base currency to the target currency using the reference currency. Further assume that the stored FX rate is a multiplier number.
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Source of Data: Bloomberg 7/27/07
Base Currency = 'EUR'
Target Currency = 'GBP'
Cross Rate Currency = 'USD'
From the FX_RATES table, get the records that match the reference currency and the Target/Base currency. Data in the FX Rates table includes:
From | To | Rate |
|---|---|---|
USD | EUR | 0.7328 |
USD | GBP | 0.4933 |
To calculate EUR to GBP conversion, divide USDtoGBP by USDtoEUR = 0.4933/0.7328 = 0.6731
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Base Currency = EUR
Target Currency = GBP
Cross Rate Currency = JPY
From the FX_RATES table get the records that match the reference currency and the Target/Base currency. Data in the FX Rates table includes:
From | To | Rate |
|---|---|---|
JPY | EUR | .0062 |
JPY | GBP | .0042 |
To calculate the EUR to GBP conversion, divide JPYtoGBP by JPYtoEUR=.0042/.0062 = 0.6774.
Note: | Regardless of which reference currency is used, the converted values should be very close to each other. Differences are due to timing. |
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PACE system id 137 must be to set to 'Y' to enable the cross currency calculation. The default is 'N'. If set to 'N', PACE assumes that all cross currency rates are loaded in the FX_RATES table.
You can store FX rates based on any currency you prefer. Most US clients store FX based on USD. However, clients in Europe might choose to store the FX rate using EUR or GBP as the reference currency. In this case, you must set up PACE system id 135 with the ISO code of the reference currency, as shown in the following figure.
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As long as the PACE system id 135 and 137, described in the previous section, are correctly defined, there is no additional setup required other than specifying the "convert to" currency. Depending on the fund's base currency, cross currency conversion can be automatically started. For example, in the profile, you might specify that the result be converted to EUR.
If one of the funds in the report has a base currency of GBP, then cross currency conversion is automatically started. PACE uses the EUR to USD and the INR to GBP to USD rates to calculate the GBP to EUR rate. This is used for conversion.
To set this up, you start the sequence indicated as shown in the following figure.
When you click the Options button in the report profile, the Advanced Options dialog box appears. See the following figure.
In the Select a Currency tab, you can specify the "convert to" currency, that is, the currency to use for the results. In this example, you are specifying that the results are converted to Euros.
If you configured the PACE system parameters to allow cross currency calculations and specified an FX cross rate currency, as described in "Enabling Cross Currency Calculations in PACE," the Select a Currency tab displays a line of text that describes this information. In the previous figure, the following text indicates that you configured the system to allow cross currency calculations and are using US dollars as the cross currency:
Cross currency process is ON using currency USD.
Consider the same profile with multiple base currencies: you can submit multiple funds with different base currencies in the same profile. The calculation first triangulates all combinations before processing individual funds. The code is optimized to make sure triangulation occurs only once per combination.
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