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this is not (directly) a quantitative question but since there are so many knowledgeable people here and I've found so many helpful discussions in the past, I ask it nonetheless (I haven't found an existing thread on this).

Say, a euro based investor - who, in the end, converts all proceeds back in euros - invests in US treasury futures and later sells them (no physical delivery involved): which part of the p&l of this transaction is affected by the change of the eurusd exchange rate?

I got two contradictory "answers" looking it up and asking people who deal with the valuation of financial products.

One was, the whole notional (number of contracts times price times contract size) is affected by the change of the fx cross rate between opening and closing of the position. In this case the fx-effect can easily outweigh the interest rate effect on this position and a separate fx hedge might be necessary.

The other was, only the change in the market value of the position in USD is subject to changes in the fx rate. In this case, as long as my opinion on the direction of interest rates is correct, I will end up with a profit in euros but which might increase or decrease depending on the prevailing fx rate.

As I understand it, the latter is what a document of the CME points to (https://www.cmegroup.com/trading/equity-index/intl-investing-currency-risk-in-equity-portfolios.html). However, it refers to equity futures instead of interest rate futures.

Can anyone shed some light on this issue?

All help is very much appreciated. Many thanks.

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The CMEGroup answer is closer to the truth, I believe. Their answers are written by people who understand how futures really work.

The futures trading account of the european investor will accumulate a (positive or negative) USD balance as a result of daily P&L on the future (equity, fixed income or commodity future, it does not matter). Once the trade is over the investor may wish to convert this USD balance (which represents the USD profit) into EUR at the then-current EURUSD rate. Only the change in market value of the position has to be converted, at the time the investor chooses to do so.

However, there may be a complication for an individual who is a tax resident of a European country. In this case, for capital gains purposes the investor will have to first compute his profit in Euros by converting the buy value and sell value of the futures at the two separate FX rates (buy date rate and sell date rate), the difference will represent the taxable capital gain. This will be multiplied by the tax rate to determine the tax the investor must pay. So strangely the taxable profit and the actual profit may be different. However, this is a technicality which needs the attention of a tax advisor for the specific european country involved. (Which I am not. I find international taxation to be a baffling subject). And for a financial institution I believe the CMEGroup answer still applies.

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  • $\begingroup$ Agree with this answer. The former suggestion in the question which suggests the "notional" of the future contract is exposed to FX is not the correct answer. Kudos for the point about tax though. I am as equally baffled in that area. $\endgroup$
    – Attack68
    Commented Apr 19 at 11:33
  • $\begingroup$ @nbbo2 and Attack68: Thank you very much for your support and answers. It helped me a lot. Best $\endgroup$ Commented Apr 22 at 8:34

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