Working with currencies

How to use this program effectively if you work with multiple currencies

Introduction

This program is able to work on investments involving multiple currencies. Some users will only use one currency. For example if you are based in the United States and buy index funds which are traded in USD, you will probably not have to worry about currencies. But most users will have investments involving foreigh currencies, in which case you need to understand how to deal with this situation.

Terminology

It is important to provide important definitions:

  • The primary currency is the currency in which the final values in the reports will be generated. In general users will use the official currency of their country of residence as their primary currency, as this is the currency in which they pay their bills and taxes.
  • Funds have a base currency, which is the currency the fund manager uses to buy and sell most investments inside the fund.
  • Funds also have a trading currency which may be different from the base currency. This is the currency in which the investment is priced on the market, and the currency you use when you buy or sell the investment.

Using foreign currencies

Investing may involve lots of different currencies. Let’s take the example of an investor based in the United Kingdom. His primary currency is the Great British Pound (GBP), and his salary and taxes are paid in GBP. This investor can buy Vangard funds such as VWRL which uses USD as its base currency, but which is traded on the market in GBP. This fund distributes quarterly dividends which are paid in USD by the fund manager. Some investment platforms will credit these dividends in USD while other investment platforms will convert the dividend into GBP. Also most investment platforms charge transaction fees or taxes, and these could be charged in various currencies. When you create records of all your investment activities, you should provide the amounts and currencies that correspond to the reality. You should let the program do the conversions automatically. The program will use the details of each transaction, and use the exchange rates provided to convert the amounts into the primary currency whenever required, so the final figures in the reports are all expressed in your primary currency.

How to record the transactions

This program uses the official three-letter ISO 4217 codes to identify currencies. Hence you will get errors if you try to use other names in places where currencies are expected in the data files. These codes are wery well known. For example you should use USD for the US Dollar, EUR for Euros, GBP for Great British Pound, etc.

You will also have to provide the values of the exchange rates each time a transaction or distribution involves a foreign currency. For example if your primary currency is GBP and you bought a fund traded in EUR, and then receive a dividend in USD, then you will have to provide the exhange rates for GBP/USD and for GBP/EUR at the dates of these two transactions so the program is able to convert all activities in your primary currency.

Exchange rates are defined for a combination of source and target currencies and time period. The time period may be as small as a single day or as long as you want. For example you may create an entry in the exchange rate table to say that the exchange rate from GBP to USD from 2025-01-01 until 2025-01-31 was 1.2707. This rate will be used by the program to convert any activity that took place during Junuary 2025.

Naturally, if you provide exchange rate data for periods that last just a day, you will have to provide more data so it covers all your activities. If you provide definitions for exachange rates that last a month, this will be less accurate but it will reduce the effort needed to update these records.

If your investment activities involve foreign transactions, the exchange rates you use matters, as they have an implication on the final calculated amounts in your primary currency. Hence these interest rates have an impact on the amount of income or capital gains you have made, and on the amount of taxes you have to pay. You should check what the tax authorities of your country say about how to determine what is the correct exchange rates so you can be compliant.