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I am backtesting a model that trades currency crosses (i.e. EurGbp) at a fixed $1 mln per trade and was curious if I need to a) account for my currency exposure to GBP on both ends of the trade or b) only upon exit?

for example with a long EurGbp Signal:

a) Use $1 mln USD to buy GBP which I then sell in order to Buy EUR, then upon signal to exit the trade, sell the EUR and purchase USD

b) simply track the EurGbp trade performance then convert back to USD on trade exit

Option a is clearly more realistic in terms of trading; however, the 'pure' model signal is to some extent distorted by the currency risk taken to leg into and out of the FX cross.

Any insights are much appreciated!

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    $\begingroup$ Your question has nothing to do with "cross-currency basis". Please don't post tags if you don't know what they mean. $\endgroup$
    – user42108
    Commented Nov 14, 2020 at 20:48

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Firstly, it's highly likely you would be trading either futures or forwards so your only concern is funding your margin at your FCM/PB (e.g. see CME) Why you would convert USD to EUR, I dk.

Secondly, you should be calculating your PNL at EOD back to your 'base' currency (which seems to be USD from your post).

Related to the above, it's common simply to hold balances in a number of currencies at your FCM/PB and periodically convert to your 'base' currency, e.g. at quarter-end, independently of your daily PNL calculations.

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