How to Calculate Currency Exposure Beyond Foreign Stock Holdings
Foreign asset returns in won depend on both local prices and exchange rates. Separate foreign cash, debt, and hedges to calculate net exposure and combined returns.
Currency exposure is calculated from how much the won value of assets and liabilities changes when exchange rates move. Check foreign-currency deposits, foreign-currency debt, and hedging contracts as well as overseas stocks. When local asset prices also change, won returns must combine local returns and exchange rate returns multiplicatively.
Distinguish trading currency from actual currency exposure
An overseas-asset ETF traded in won can still be affected by its underlying assets' currencies if it does not hedge currency risk. Likewise, a dollar-denominated stock may generate revenue and incur costs in several currencies, so the company's operating sensitivity to exchange rates is a separate issue. At the account level, first map translation exposure and leave business sensitivity for the next stage. Do not mix the two effects into one figure or add overseas revenue as if it were a foreign-currency balance in your personal account.
Subtract matching liabilities from foreign-currency assets
If you have assets and liabilities in the same currency, examine how closely their amounts and maturities match. When the exchange rate rises, foreign-currency assets gain won value while foreign-currency liabilities become more costly to repay, so they can partially offset one another. However, stock prices change while loan principal is fixed, making this an imperfect hedge. Even when using contracts such as currency forwards, check the actual hedged exposure, maturity, and contract size. Do not state that all risk has been eliminated based on notional amounts alone.
Separate currency and share-price effects in won returns
Excluding costs, the won return is (1+local return)×(1+exchange rate change)−1. Here the exchange rate is defined as the amount of won needed to buy one unit of foreign currency. Simply adding the two returns omits the cross-product term. In accounts with dividends and additional purchases, exchange rates differ across cash flows, so a single-purchase, single-sale example cannot be applied unchanged. Keep the dates and currencies of incoming funds so performance can be reproduced.
Record the timestamp of the exchange rate used in the exposure table. Mixing closing prices from different exchanges with real-time exchange rates can make some changes appear double-counted or omitted. Keep local-price results alongside won-based results to avoid mistaking currency gains for stock-analysis performance. If you have future spending in foreign currency, separately check whether you have secured the required amount in that currency, as well as reviewing translated gains or losses in won.
Worked example
Hypothetical example: If you hold USD 10,000 in stocks and USD 2,000 in cash, with USD 3,000 in debt, net exposure with asset prices held constant is USD 9,000. If the exchange rate rises from KRW 1,300 to KRW 1,430 per dollar, net won value increases by KRW 1.17 million. Looking separately at the stock, a 10% decline in its dollar price and a 10% rise in the exchange rate produce a won return of 0.9×1.1−1=−1%. They do not offset exactly to 0%.
What to check
- Have you standardized exchange rates as won per unit of foreign currency?
- Have you included foreign-currency cash and liabilities in the same currency?
- Have you checked the ETF's currency hedging policy?
- Have you included the cross-product term between stock and currency returns?
Sources and primary materials
This is educational material about research methods. For an actual company decision, verify the filings and primary sources for the relevant period.