Currency Conversion Example
The following figure shows an example of currency conversion.
Currency Conversion and the Euro
The Currency Conversion report supports the conversion of returns to and from the Euro. The figures below show how this works.
Select the Currency Tab Fields for On the Fly Currency Conversion
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. 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. |
Cross Currency Calculations and Triangulation
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 Set Up the Report Profile for Triangulation.
You can use this option with all Data Management and Performance reports.
Cross Currency Calculation Setup Background
For cross currency calculation, these PACE system components are the most significant:
- The PACE_SYSTEM table 40 is accessed to determine if the FX rate is a multiplier or divisor. The default (0) is multiplier and (1) is a divisor.
- The internal field attribute 294 points to the FX_RATES column that is used for calculations. By default it will be spot rate column.
- The existing "Days to Look Back" feature is accessed.
- A second currency option dealing with EUR currency is accessed.
Triangulation Basics
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.
Cross Currency Triangulation - Best Practices
Eagle "Best Practice" recommends always storing from the Domestic currency (USD for USA clients) to a foreign currency. The following sample calculation assumes the data is stored that way. Assume the following Cross Currency system setup:
- Portfolio Base to Target Currency = Reference to Target/Reference to Base
- Get the FX Reference Currency (Perf System table)
Triangulate from the base currency to the target currency using the reference currency. Further assume that the stored FX rate is a multiplier number.
Triangulation Processing Example 1
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
Triangulation Processing Example 2
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. |
Reverse FX conversion - A Special Case of XCurrency Calc
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.
For example, assume you use the Indirect method and load the following FX rates:
From currency: GBP
To currency: USD
Rate: 1.5
Now consider if you want to convert from USD to GBP using this rate:
Rate in calculation = 1/1.5
This scenario works if the FX is stored as a multiplier or divisor.
Stored as Multiplier:
1 GBP = 1.5 USD
To convert 100 GBP to USD = 100 * 1.5 = 150USD
To convert 100 USD to GBP = 100 * (1/1.5) = 66.66667 GBP
Stored as Divisor
1USD = 0.666667 GBP
To convert 100 GBP to USD = 100/0. 666667 = 150USD
To convert 100 USD to GBP = 100 * (1/0. 666667) = 66.66667 GBP
Enable Cross Currency Calculations in PACE
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.
FX Conversion for Inception to Date (ITD) Fields
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:
- Y (Yes). (Default) Inception to date (ITD) Date Rule currency conversion uses the FX rate as of the entity's inception date. If the entity has an inception date that occurs mid-month, allows you to capture the currency impact only for part of that month.
- N (No). Inception to date (ITD) Date Rule currency conversion uses the FX rate as of the month end before the entity's inception date. If the entity has an inception date that occurs mid-month, allows you to capture the currency impact for the entire month.
This option affects Performance Link Analysis (PLA) fields used in Performance Analysis reports, as well as Composite Performance Analysis (CPA) fields used in Composite Analysis reports. It does not affect calculations for Daily frequency. For more information about CPA fields, refer to the GIPS Composite Management User Guide.
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.
Set Up the Report Profile for Triangulation
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.
Log File Messages
Logs at Level 10 includes a section that simplifies debug triangulation issues. Log entries repeat for each Cross Currency calculation and effective date as shown.
11/27/2007 13:52:21-> Level:10, FXConverter - Triangulation Flag - Y
11/27/2007 13:52:21-> Level:10, FXConverter - Calculating Triangulation Rates with respect to CASHUSD
11/27/2007 13:52:21-> Level:10, FXConverter Triangulation - From Rate-[CASHUSD-CASHEUR]0.857000, To Rate-[CASHUSD-CASHINR]42.472000, Triangulated Rate-[CASHEUR-CASHINR]49.558926 as of 01/01/99
11/27/2007 13:52:21-> Level:10, FXConverter Triangulation - From Rate-[CASHUSD-CASHGBP]0.625000, To Rate-[CASHUSD-CASHINR]45.000000, Triangulated Rate-[CASHGBP-CASHINR]72.000000 as of 04/30/03
11/27/2007 13:52:21-> Level:10, FXConverter Triangulation - From Rate-[CASHUSD-CASHINR]42.472000, To Rate-[CASHUSD-CASHEUR]0.857000, Triangulated Rate-[CASHINR-CASHEUR]0.020178 as of 01/01/99
11/27/2007 13:52:21-> Level:10, FXConverter Triangulation - From Rate-[CASHUSD-CASHINR]45.000000, To Rate-[CASHUSD-CASHGBP]0.625000, Triangulated Rate-[CASHINR-CASHGBP]0.013889 as of 04/30/03
11/27/2007 13:52:21-> Level:8,
Finished Loading FX Rates...
View FX Rates Used in the Report
As you review the report results, you can use Eagle Eye Analysis to view the FX rates used in the analysis when performing currency conversions. For details, refer to "FX Rates Sheet."
Use Currency Conversion for IRR Calculations
Performance Analysis reports allow you to perform currency conversion for Internal Rates of Return (IRR) calculations. The Performance Analysis currency conversion converts the inputs of cash flows and market values to the target currency using loaded FX rates and then uses those converted inputs to calculate the IRR.
To use FX conversion for Performance IRR Analysis fields, perform the following setup tasks:
- Load exchange rates to the database.
For general information about foreign exchange rates data, refer to the Performance Calculation User Guide. - In the Performance IRR Analysis field, ensure that the underlying fields you select as the Beginning Market Value, End Market Value, and Cash Flows fields have their respective Currency Process fields set correctly.
- Set the Beginning Market Value Currency Process field set to Begin Value. Eagle Performance converts the beginning market value with the FX rate that has an effective date prior to the effective date of the beginning market value, unless the field is an inception-to-date field. If the field is an inception-to-date field, Eagle Performance converts the beginning market value at the FX rate from the inception date of the entity.
- Set the End Market Value Currency Process field to End Value. The ending market value uses the FX rate from the effective date of the ending market value or the final cash flow.
- Set the Cash Flows Currency Process fields as follows.
Daily frequency and set the Currency Process field set to End Value, Eagle Performance uses the FX rate from the effective date of the cash flow in converting that cash flow.
Daily frequency and set the Currency Process field set to Begin Value, Eagle Performance uses the FX rate from the previous business calendar day in converting that cash flow.
Monthly frequency and set the Currency Process field set to End Value, Eagle Performance uses the FX rate from the effective date of the cash flow in converting that cash flow.
Monthly frequency and set the Currency Process field set to Begin Value, Eagle Performance uses the FX rate from the previous month end date of the cash flow in converting that cash flow.
The Performance Analysis report uses the correct FX rate based on cash flow effective date, frequency, and the Currency Process value selected.
An example of a cash flows field in shown in the following figure.
For more information about setting the Currency Process attribute for Regular fields, refer to the section that describes Performance Database Field Attributes in the Performance Calculation. - Within the Performance Analysis report profile, click Options, then select the appropriate currency conversion settings on the Select the Currency tab of the Advanced Options dialog box. To illustrate, two examples follow:
The IRR field is a one year IRR field as of 12/31/07. Cash flow Currency Process is set to End Value. The frequency is Monthly. The system converts the begin market value using an FX rate from 12/31/06 (beginning market value effective date), and converts the end market value using an FX rate from 12/31/07 (End Market Value effective date). It converts the cash flows with the FX rate with the effective date of the cash flows.
The IRR field is an inception to date field with the entity inception date of 01/15/07. Cash flow field Currency Process is set to Begin Value. The report as of date is 12/31/07. The frequency is Monthly. The system converts the beginning market value with the FX rate with the effective date 01/15/07 (the entity inception date). It converts the cash flows using the FX rate from the previous month end date. It converts the ending market value with the FX rate from the ending market value effective date.
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