You will be able to explain how currency moves change your return in SGD, separately from what you paid to convert.
Hakim bought a US company's shares a year ago. His broker's app shows the share price up 6% in US dollars, and he was pleased about it until he switched the display to Singapore dollars and saw a small loss. He checked the fees again. They were what he expected. The rest of the gap had nothing to do with what he paid to convert. It came from what the US dollar did while he held it.
Lessons 2.1 and 2.2 were about conversion cost: the spread and fees you pay each time you change money. This lesson is about currency risk: the change in your result because the exchange rate moves while you are invested. They are separate, and mixing them up leads to bad fixes.
When you own something priced in US dollars, your return in Singapore dollars depends on two things. One is the asset's return in US dollars. The other is how much the US dollar rose or fell against the Singapore dollar over the same period.
To combine them, add 1 to each, multiply, and subtract 1. If the asset rises 10% and the US dollar falls 8%, your return in Singapore dollars is 1.10 times 0.92, minus 1, which is 1.2%. Adding the two percentages, 10% minus 8%, gives a quick estimate of 2%, which is near enough when both moves are small. Build and run an ETF portfolio works through the same formula in more depth for whole portfolios.
Say Hakim invested S$13,500 when the rate was S$1.35 per US dollar, so he bought US$10,000 of a US stock. A year later the stock is worth US$11,000, up 10%. Over the same year, the US dollar fell 8% against the Singapore dollar, so one US dollar now buys S$1.242. His US$11,000 converts to S$13,662. In Singapore dollars he made S$162, or 1.2%, even though the stock rose 10%.
Now change one number. If the stock had risen only 6%, his result would be 1.06 times 0.92, minus 1, which is about minus 2.5%. The stock went up, and he lost money in Singapore dollars. That is the situation his app was showing him.
It runs the other way too. If the stock had risen 10% while the US dollar rose 5%, his result would be 1.10 times 1.05, minus 1, or 15.5%. A strengthening US dollar adds to your return and a weakening one takes from it.
Some funds offer a currency-hedged share class. The fund uses currency contracts to offset most of the movement between the fund's currency and the currency of the share class. A hedged class priced in Singapore dollars aims to give you something close to the underlying return without the US dollar swings.
Hedging has costs. The contracts cost money to run, and the cost depends in part on the difference in interest rates between the two currencies, which changes over time. The fund documents describe the hedging method and its costs, so read them rather than assuming a hedged class is a free version of the same fund. Whether to hedge is a portfolio decision, covered in Build and run an ETF portfolio, lesson 5.3, Hedged share classes: when they help.
A common reaction is to wait for a better exchange rate before converting. It feels like control. But your currency exposure does not come from the moment you convert. It comes from holding assets priced in a foreign currency for as long as you hold them. Converting at a good rate today does nothing about what the US dollar does over the next ten years.
So the useful question is not when to convert. It is how much of your money should depend on foreign currencies at all, given what you are saving for. Money you will spend in Singapore dollars in two years is very exposed to a currency swing. Money for retirement in thirty years has time for swings in both directions, and Build and run an ETF portfolio sets out how to decide your limits. This course stays with the mechanics: knowing which part of your result came from the asset and which from the currency.
Hakim's one-year loss came out of exactly this split. Once he could see it, he stopped looking for a hidden fee and noted the currency move instead. In the activity you will run the same split on one of your own holdings, using its price a year ago, its price now, and the exchange rate at both dates. The MAS website publishes exchange rate data you can use for the rates.
Pick one overseas holding and split its return over the past year into the part from the asset price and the part from the exchange rate.
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