How to use the foreign investment return calculator
Return in your currency looks back at an investment and splits its result into the asset’s own return and the currency’s effect. Hedging cost looks forward and prices the removal of the currency risk.
- Choose your home currency and the investment’s currency, then enter the amount you invested in your own currency and how many years you held it.
- Choose how you enter exchange rates. Use the direction your source quotes. A US investor in Europe would normally see EUR/USD, dollars per euro; a US investor in Japan would see USD/JPY, yen per dollar, which is the second option.
- Enter the rate when you bought and the rate when you sold, or today’s rate for an investment you still hold. The defaults are example values, not market data.
- Enter the asset’s return in its own currency, including dividends or interest, as a total for the period or per year. A local-currency factsheet gives this figure.
For the hedge, enter today’s spot rate, a short-term interest rate in each currency for the hedge horizon (a government bill or money-market rate), the horizon and the local return you expect.
The formulas
Return in your currency = (1 + Local return) × (1 + Currency return) − 1
Annualized return = (1 + Total return)1 ÷ years − 1Rates here are home currency per one unit of foreign currency. If you enter them the other way round, the calculator inverts them first. Local return is the asset's total return in its own currency over the holding period.
A forward contract locks in today the rate at which you will convert later. Covered interest parity sets that rate:
Hedge gain or cost per year = (1 + ihome) ÷ (1 + iforeign) − 1 ≈ ihome − iforeign
Hedged return per year = (1 + Local return) × (1 + Hedge gain or cost) − 1ihome and iforeign are annual interest rates for the hedge horizon, T is the horizon in years. A positive result is a gain from hedging, a negative one a cost. The hedged return assumes the hedge covers the whole value of the investment.
A worked example
Return in dollars. A US investor converts $10,000.00 into euros at 1.1 dollars per euro, buying €9,090.91 of a European fund. Over 3 years the fund returns 25.00% in euros, and the holding grows to €11,363.64.
By the time of the sale the euro has slipped to 1.05 dollars, a currency return of -4.55%. Converted back, the holding is worth $11,931.82: a return of 19.32% in dollars, or 6.06% a year, against 7.72% a year for a European investor in the same fund.
Hedging. With the euro at 1.1 dollars, US rates at 4% and euro rates at 2.25%, the one-year forward rate is 1.1188, a premium of 1.71%. Selling euros forward therefore earns 1.71% a year, close to the simple rate gap of 1.75%. On $100,000 that is $1,711.49. An expected 7% local return becomes 8.83% hedged, whatever the euro does.
What the currency move does to the same investment
The fund’s 25.00% euro return stays the same in every row below; only the exchange rate at the sale changes.
| Euro at sale | Currency return | Return in dollars | Per year |
|---|---|---|---|
| 0.88 | -20.00% | 0.00% | 0.00% |
| 1.05 | -4.55% | +19.32% | +6.06% |
| 1.1 | 0.00% | +25.00% | +7.72% |
| 1.21 | +10.00% | +37.50% | +11.20% |
A 20% fall in the euro wipes out a 25.00% gain entirely, and a 10% rise turns it into a 37.50% return. Over a few years, moves of that size between major currencies are common, so the currency can matter as much as the choice of fund.
Hedging: the cost depends on where you stand
A currency hedge sells the foreign currency forward, so you know today the rate at which you will convert back. The forward rate is not a forecast of where the currency will trade. It is simply the spot rate adjusted for the interest you would earn holding one currency rather than the other, because otherwise banks could make a riskless profit by borrowing in one currency and lending in the other.
That makes the hedge’s cost or gain predictable, and it has opposite signs for the two sides of the same pair:
| Investor | Hedges | Hedge result per year | Expected 7% local return, hedged |
|---|---|---|---|
| US investor | Euros | +1.71% | +8.83% |
| Euro investor | Dollars | -1.68% | +5.20% |
The investor whose home currency pays the higher interest rate earns the gap by hedging; the one whose home currency pays less gives it up. When rates are similar, hedging is close to free apart from transaction costs.
What hedging gives up is the chance of a currency gain. The chart under the hedging tool shows it: the hedged return is a flat line, while the unhedged return rises and falls with the currency. The two cross at the forward rate, so the unhedged investment only comes out ahead if the euro rises more than 1.71% over the year.
What this calculator does not include
- Live exchange and interest rates. All rates are inputs; the defaults are illustrations.
- Conversion costs. Banks and brokers add a markup when you convert. The currency converter measures it.
- Taxes. Foreign dividend withholding taxes reduce the local return. In the US, a gain on a foreign investment is generally measured in dollars, so the currency move is part of the taxable gain.
- Real-world hedge frictions. Funds roll short forward contracts and adjust them as the investment’s value changes, which adds trading costs and leaves small mismatches. Market forward rates use money-market day counts and can include a cross-currency basis, so they differ slightly from the formula.
- Inflation. A currency that loses value often has higher inflation. The real return calculator adjusts a return for inflation in your home currency.