Accounts transacting in non-base currencies will have Forex P&L implications even if they are not directly trading currencies. For example, an account with a base currency of EUR that trades USD denominated shares will have USD Forex P&L even if they never perform a currency conversion.
- This applies to any type of transaction in a non-base currency; such trading shares/bonds/options, depositing/withdrawing cash, interest/dividends, FX conversions, etc.
- Note that only the cash impact from futures is factored into Forex P&L and not the notional value.
The resulting P&L from this activity is captured in two forms Realized/Unrealized & Mark to Market which utilize different calculation methods and can result in significantly different numbers. Note that Realized/Unrealized P&L is an accounting-specific value while the Mark to Market P&L represents the actual impact to the account value.
- Customers will ultimately need to refer to a tax professional to determine how exactly they must report any Forex related P&L
To illustrate the difference, assume that a trader has no USD cash and purchases 100k USD in shares without converting any currencies which creates a 100k debit balance. Also assume no price change in the shares.
- Realized/Unrealized P&L now has an open lot of (100k) USD from the cash used to purchase the shares, and will track P&L from the FX movement until that lot is closed out.
- Mark to Market P&L, however, looks at the net exposure of +100k from the value of the USD shares and (100k) from the USD cash = 0 net USD exposure and therefore there is no P&L.
Additional Information
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.