Why a Dollar Investment Gain Can Produce a Much Lower Won Return
Calculate won returns by multiplying overseas stock performance by the change in the won–dollar exchange rate. Examples explain how conversion timing, dividends, fees, and additional deposits affect comparisons.
With no additional deposits, withdrawals, or costs, the won return is calculated by multiplying the change in the dollar asset’s value by the change in the won–dollar exchange rate. The formula is (1 + dollar return) × (exchange rate at sale or valuation ÷ exchange rate at purchase) − 1. Simply adding the two percentage changes omits their interaction and can also overlook exchange rate effects while holding dollar cash.
Use consistent investment start and end points
If the stock purchase date differs from the date won was converted into dollars, two separate performance measures are possible. Dollar investment performance compares changes in the dollar balance, while won investment performance runs from the initial won outlay to the final won value. If the investor pays a currency conversion spread, a return based only on quoted exchange rates will differ from the account return. When stocks are purchased with dollars already held, specify the valuation start date so that total performance since the original conversion is not confused with performance since the stock purchase.
Convert dividends and interim cash flows separately
Even if a stock’s dollar price is unchanged, receiving a dividend makes its total return different from its price return. The final won value depends on whether dividends were immediately converted into won, retained in dollars, or reinvested. If additional money was deposited along the way, a simple increase in the account balance is not a measure of investment performance. When comparing accounts with multiple contributions, consider returns that reflect cash flow dates or link returns across subperiods. Taxes vary by investor and product, so do not present a pretax example as an actual after-tax result.
Review currency effects separately from stock selection
Investor.gov explains that exchange rates can increase or reduce returns on international investments. A strong won return despite a falling dollar share price does not establish that the stock selection was sound. Conversely, a company may grow while a stronger won reduces the won return. It is useful to record dollar total return, exchange rate changes, and costs separately. This simple formula is difficult to apply directly to currency-hedged products because of hedge costs and hedge ratios; first check the currency of the product’s own net asset value and its hedging policy.
Worked example
Hypothetical example: You invest $10,000 at an exchange rate of KRW 1,300, spending KRW 13 million. The stock’s value rises 10% to $11,000, but the exchange rate falls to KRW 1,200, leaving a won value of KRW 13.2 million. The gain is KRW 200,000, or approximately 1.54%. Adding the 10% dollar return to the approximately −7.69% exchange rate change gives 2.31%, which is not the correct result. This example excludes dividends, taxes, trading costs, and currency conversion costs.
What to check
- Did you use the currency conversion date or the stock purchase date as the starting point?
- Have you accounted for dividends in addition to price returns?
- Have you separated interim deposits and withdrawals from remaining dollar cash?
- Have you used a consistent exchange rate basis for the initial investment and valuation?
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.