Accounting for Positions in Currency
Positions in Currency are accounted for in a different way from positions in all other securities.
In the RiskWin framework, positions in currency are treated as either deposits or loans.
[Long positions are treated as deposits and short positions are treated as loans.]
Therefore, whenever a trade in a currency is created, it is treated as either a deposit or a loan and is
entered as having a zero cost base.
All positions in currency that are valued at future dates are deemed to accrue
the appropriate interest earnings or charges, thus facilitating the capture of
funding costs of trades in other securities.
It is highly recommended that all positions in currency be allocated to portfolios dedicated to capturing the funding costs of the trading operation.
For example, the funding of a trade in an option which had a total cost of USD
100 can be captured by entering a trade in the currency USD which is short 100
contracts of USD.
The net value of the combined positions will then capture the funding cost of
the initial option trade.
For those trading operations that require accounting for foreign exchange,
additional funding portfolios can be set up. A modest operation might account for
their currency trades using just two funding portfolios: a Domestic Currency
Portfolio and a Foreign Currency Portfolio. The risk manager can capture the
funding costs for analysis by aggregating positions appropriately in Synthetic Portfolios.