Stronger dollar

Start with the direction of the currency quote

Every FX input is the percentage change in USD received for one unit of the foreign currency. A negative number therefore reduces an unhedged foreign holding's USD value. The SEC's forex bulletin warns that quoting conventions differ across currencies [2]; an increase in USD/JPY is not an increase in USD per yen.

Here each supported foreign currency loses 15% against USD. The reciprocal quote rises approximately 17.647%, calculated as one divided by 0.85 minus one. Calling this a uniform 15% rise in every dollar quote would be incorrect. Equal shocks also leave the ratios among these three foreign currencies unchanged.

Compound translation with the local price movement

The SEC's international-investing reference explains that exchange rates can raise or reduce investment returns [1]. In this calculation the USD growth factor equals the local growth factor times the currency growth factor. Simply adding the two percentage changes drops their interaction and produces the wrong answer.

For a hypothetical EUR equity holding at beta one, the 10% local decline combines with the 15% currency decline to give a 23.5% USD loss: 0.90 times 0.85 minus one. The positive interaction is 1.5 percentage points relative to simple addition; it is arithmetic, not a separate investment gain.

Explain why the frozen portfolio has no FX loss

Every default holding is denominated in USD, so its FX change is zero despite the preset's name. The reported loss instead comes from equities and the corporate spread exposure. This is a useful control: a scenario label must not be mistaken for attribution of the reference portfolio's result.

The government-rate shock is zero, so fixed duration and convexity contribute nothing. Corporate spread duration still applies to widening spreads; equity beta remains fixed against the independent stock shock. The engine does not estimate indirect effects on multinational revenues, imported costs or foreign issuers simply because USD has strengthened.

Foreign cash is not USD cash or a currency hedge

A hypothetical EUR cash balance entered at a starting USD equivalent of $1 million loses $150,000 under this preset, despite a zero local cash return. Starting values must already be USD equivalents. Entering the number of euros instead would corrupt both the loss calculation and the portfolio denominator.

There is no hedge-ratio field or forward-contract valuation. Relabelling a hedged foreign fund as USD can conceal basis, hedge-roll and residual exposure; modelling the hedge requires a separate method. The SEC also notes currency controls and market-access risks [1], neither of which is represented by a smooth translation percentage.

Check mapping before changing the currency shock

USD is the fixed reporting currency; EUR, GBP and JPY are the supported foreign denominations. Their allowable shocks run from minus 50% to plus 50%. This numerical range is not a probable trading band. Other currencies, cross-currency derivatives and changing hedge effectiveness are outside the supported mapping.

Review mixed-currency funds using documented exposure information without counting both the fund and its constituents. Keep unsupported holdings visible as unmodeled, rather than declaring them immune to FX. The scenario is a static hypothetical comparison with no currency path, interest carry, conversion costs or calibrated probability of the combined moves.

Review checkpoints

• Use USD per foreign unit consistently; reciprocal percentage changes are not equal and opposite.
• Multiply local and FX growth factors instead of adding their returns.
• The default USD portfolio has no direct FX contribution, and foreign cash still has translation risk.

Source notes

1. SEC Investor.gov: International Investing
2. SEC Investor.gov: Foreign Currency Exchange (Forex) Trading For Individual Investors, quoting conventions

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