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Please validate my unrealized Fx P&L calculation on the commodity forward contract e.g. consider i have bought 1 MT of wheat at 300 EURO my financial currency for company is USD. I am using below formula to get attribution .

(Market Price - Commodity Price )*(Today FX Rate- Yesterday FX Rate)

The above formula is used for daily fx loss and gain on the forward position . But above failed when the market price = commodity price .

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Hope this illustration helps to understand fx effect:

Picture

Examples:

  • if px_0 = 100; px_1 = 100; fx_0=1.3; fx_1=1.4 then your total p&l would be only due to Fx: TotalP&L = Px_0 * (Fx_1 - Fx_0) = 100 * (1.4-1.3) = 10

  • if px_0 = 100; px_1 = 110; fx_0=1.3; fx_1=1.3 then your total p&l would be only due to Px: TotalP&L = (Px_1-Px_0) * Fx_0 = (110 - 100) * 1.3 = 13

  • if px_0 = 100; px_1 = 110; fx_0=1.3; fx_1=1.4 then your total p&l would be both due to Px, Fx and cross-effect: TotalP&L = (Px_1-Px_0) * Fx_0 + P_0 * (Fx_1-Fx_0) + (Px_1-Px_0)*(Fx_1-Fx_0)= (110 - 100) * 1.3 + 100 * (1.4-1.3) + (110-100)*(1.4-1.3)= 13 + 10 + 1 = 26

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You might over think it :-)

  • Your account is in USD
  • You buy for 300 EUR wheat and the price now is 320 EUR
  • the EURUSD is 1.24688 (2. december 2014) at the time you buy
  • the EURUSD is 1.24347 (now - 11. december 2014)

320 * 1.24347 - 300 * 1.24688 = 23.8464 USD profit

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  • $\begingroup$ so what will happens if market price does not change which means my fx loss&gain is zero $\endgroup$ – user1131338 Dec 12 '14 at 6:19
  • $\begingroup$ If the market price stays at 300 EUR, your still exposed to the currency risk between the EUR and USD, as the 1 MT wheat is traded in EUR and your trading account is in USD - you need to exchange the EUR value of the wheat to USD at some point. $\endgroup$ – chjortlund Dec 12 '14 at 9:33

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