Foreign cash can lose value in the reporting currency

Start with a USD-equivalent value

The inventory contains one cash holding with a value of $1,000,000 and currency EUR. The value field is already a USD equivalent; it is not a count of one million euros. The currency label identifies the local denomination whose dollar value is shocked. Entering a local-currency amount without first translating its starting value would misstate the exposure and every resulting dollar figure.

No current spot quote is needed because the calculation starts from a dollar valuation and applies a relative currency move. For a separate real inventory, retain the local balance, valuation date, exchange-rate source and quote convention behind that starting value. Here the balance and shock are invented teaching inputs, and the position is assumed unhedged. No deposit statement or live rate was used.

Specify the direction of the currency change

This example begins with the zero-shock reference and changes only EUR to -10%. Equity, government-rate, credit-spread, GBP and JPY shocks remain zero. It is therefore a custom currency sensitivity, not the untouched zero-shock preset or the broader stronger-dollar preset. The FX percentage describes the change in USD per unit of local currency: one euro buys 10% fewer dollars after the assumed move.

Quote direction matters because reciprocal percentage changes differ. If USD per EUR is multiplied by 0.90, EUR per USD is multiplied by 1 / 0.90, an increase of approximately 11.1111%, not 10%. The ECB publishes reference rates against the euro and warns against using them as transaction prices. Its convention is useful context, but no ECB rate is an input to this hypothetical shock.

Reproduce the translation arithmetic

The engine combines local and currency returns multiplicatively: USD return = (1 + local return) * (1 + FX return) - 1, using decimal returns. Cash has zero modeled local return, so the multiplier is 1.00 * 0.90 = 0.90. Applying that multiplier to the starting USD equivalent gives $900,000. Subtracting the $1,000,000 starting value produces -$100,000 of modeled P/L.

Both the total portfolio value and the covered value are $1,000,000 because this report contains only that holding. Dividing modeled P/L by either denominator gives -10%; value coverage is 100%. The starting total, not the $900,000 ending value, is the return denominator. A zero local return therefore coexists with a negative reporting-currency return without any inconsistency.

Do not generalize the cash shortcut

Adding local and FX percentage returns happens to work here only because the local return is zero. For a separate illustrative asset gaining 8% locally while its currency falls 5%, multiplication gives 1.08 * 0.95 - 1 = 2.6%, rather than 3%. The missing 0.4 percentage point is the interaction term. That comparison explains the method; it is not an additional result for this cash holding.

The SEC's International Investing guidance identifies exchange-rate changes as a source of increases or reductions in investment returns. This example isolates that translation channel. It does not estimate expected currency appreciation, assign a probability to the decline or imply that foreign cash is inherently unsuitable. The relevant reporting currency depends on the question and the obligations being evaluated.

Identify what cash coverage leaves outside

The model excludes deposit interest, transaction spreads, taxes, account charges, counterparty failure and transfer restrictions. It also contains no forward contract or other hedge. A currency label does not net a hedge automatically, and a hedge's costs, settlement and collateral needs require their own treatment. Full market-value mapping establishes only that this cash position enters the formula, not that the account is liquid, protected or operationally accessible.

Questions for a useful exposure review

Is the cash needed for USD payments, or for obligations already denominated in euros? Is any hedge documented separately, with matching size and maturity? Could a transfer delay create a funding problem despite the unchanged euro balance? Confirm the valuation date and quote direction before comparing reports. Preserve the $100,000 translation loss as a conditional USD measurement, not a realized conversion cost or a recommendation to exchange currencies.

Review checkpoints

• The $1 million input is a USD equivalent, not one million euros.
• Zero local return plus -10% FX gives -$100,000 P/L and $900,000 ending value.
• Use multiplicative translation when local returns are nonzero.
• Keep hedges, liquidity and actual conversion costs separate.

Source notes

1. SEC Investor.gov: International Investing, exchange-rate risk
2. European Central Bank: Euro foreign exchange reference rates and quote convention

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