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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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The Currency Conversion report supports the conversion of returns to and from the Euro. The figures below show how this works.
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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.
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Option | Description |
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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. If you select this option, option 2, which allows you to specify an alternate currency, becomes unavailable. |
2. Convert each Entity's base currency to: | You can specify an alternate currency to convert the returns and other values to this currency. If you select a value, option 1. Convert benchmark to portfolio base currency, becomes unavailable, and the system converts each benchmark to the specified alternate 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. For example, for a request to convert the report to the EURO (start date of 1/1/99). The report calculates a 3-year return as of 1/31/2000 for a USD-based fund. If a Second Alternate Currency is not defined, then PACE is not able to convert the return. However, if the French Franc (FRF) is selected as the Second Alternate Currency then PACE converts the return using the USD to FRF return from 1/31/1998 to 1/1/1999 and the USD to EURO return from 1/1/1999 to 1/31/2000. |
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. In other words, if you have the fetch set to 3 days and there is no FX rate for the effective date of the report, FX rates up to 3 days prior to that effective date can be used in the report. The report tries to use the FX rate for the effective date first, if a rate does not exist, then the exchange rate for the day before the effective date is used. |
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. For example, you can store the returns for benchmarks in several different currencies and the report retrieves those if you decide to convert returns to another currency. It looks for and uses the data calculated and published by the vendor in the specified base currency instead of convert the returns dynamically. |
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 Enable 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.
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| 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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For cross currency calculation, these PACE system components are the most significant:
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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'
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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:
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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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This Reverse FX Conversion process is triggered only if the Cross Calculation system variable is set to 'Y'. Clients typically load FX rates to one currency, but there might be scenarios where they have to convert the other way around.
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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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You can configure Performance System Parameter Sys Item 32, Use the FX spot rate as of inception date for monthly frequency ITD currency conversions, to determine how the system performs currency conversion for fields with inception to date (ITD) Date Rules for the fund's first month since inception. Options include:
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For PLA fields, this option affects those fields where under Period Options, you select the I would like to link the returns using the Date Rule option, and then choose a Date Rule associated with the inception date. It does not affect those PLA fields where you select the I want to calculate option, and choose a corresponding inception date field to calculate To date returns.
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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.
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