How Your Type of Stock Trading Account Affects Currency Risk?

With Interactive Brokers, if you have a margin account and your base currency is Australian dollars like mine, and I want to buy US dollar stocks. The way it works in Interactive Brokers is I want to buy US dollar stocks, I’ve got Australian dollars in my account, but it’s a margin account. I don’t have to convert my Australian dollars to US dollars and then you use the US dollars to buy US stocks. You don’t have to do that.

What you do is you just buy Apple stock, which is in the US in US dollars and Interactive Brokers borrows, let’s say I buy $5,000 worth of Apple. Interactive Brokers borrows for me 5,000 US dollars and then uses those borrowed US dollars to buy Apple, so I have a short exposure on the US currency through the dollar loan. I have a long exposure on the US currency through the owning of the Apple asset. Those two net each other out as long as the share price doesn’t move. If the share price moves one way or the other, they get out of sync and there’s a little bit of currency risk. But when you open the trade, the currency risk is neutralized.

If it’s a cash account and you’ve got Australian dollars and you want to buy 5,000 US dollars worth of Apple, you have to convert to 5,000 US dollars and then you use the 5,000 US dollars to buy the 5,000 US dollars worth of Apple. You have made a conversion, therefore if the currencies fluctuate, you have currency risk. Because there’s no short position in the currency, in the long position of setting each other like there was in the margin account.