Interactive Brokers allows its clients to trade in overseas equities markets, buying or selling shares in
foreign companies and offers two ways to deal with currency exposure.
This short video will explain how investors can use a Portfolio Margin account to automatically borrow
money to finance an overseas stock trade or how they can choose to attach a currency component to
the stock trade at the time of order entry.
In this example, a client with an account based in US$ wants to buy shares in a Toronto-listed company
trading in Canadian dollars. At the time of the trade the client has a zero balance in his Canadian dollar
account and has no existing stock position. You can see this using the account window.
Before the transaction, clients could simply enter a forex transaction to convert from base currency to
the destination currency, enough foreign exchange to cover the amount they wish to trade. In this case,
they might enter an order to sell US and buy Canadian dollars at the prevailing exchange rate. The result
would be a Canadian dollar deposit balance in their account. When it comes time to place the Canadian
equity trade, any balance in the account would be used to settle the trade.
But let’s assume a zero Canadian balance for now. Select the required Canadian stock to ensure the TSElisting is displayed in TWS. Click on the Buy button to generate an order to buy and select the
appropriate quantity, price and time in force for the order.
At this point, if you do nothing when you submit the trade for execution, IB’s software will detect a zero
Canadian dollar balance and will automatically create a margin loan on which you will be charged at the
prevailing rate of interest.
In the Account window, you will see values for Total Cash balances and Stock values for each currency. If
you use a PM loan, your cash balance will show as a negative balance while the value of the stock
position will display a positive number.
Investors can avoid paying interest associated with a margin loan by undertaking the currency trade
together with the stock transaction.
With the ticker symbol loaded in the Order Entry panel, click on the Buy button. Enter the quantity, price
and time-in-force for the trade.
Click on the Advanced expand button to the right of the order input fields and then expand the Hedge
button. From the first input dropdown menu, select FX Order. TWS will determine the correct currency
pair based on your account base currency and the currency for the share purchase. It will also correctly
determine which part of the currency pair to buy and which to sell, so you don’t have to make any
further selection. Check the box to the left of the FX Hedge.
The Order Entry panel will add +FX Order in yellow font to conform that a Child has been added to the
You are ready to Submit the order. Note the two transactions appearing on the Order Preview pop-up.
One describes the stock transaction with Blue font showing that you are buying shares. The red font
shows that the US/Canadian dollar pair is being sold in this case in order to exchange base currency to
fund the purchase of Canadian dollars to settle the trade.
Be aware that the dollar is not always the first unit listed in a currency pair. The convention for trading in
British pounds is to list the pound as the main unit to read the number of US dollars one pound buys. If
buying shares in Barclays on the LSE for example, when attaching the FX order to buy pounds and sell
dollars, the Order Preview window will display a BUY for the shares and a BUY for the pound/dollar
currency transaction. Both are shown in blue font. As I mentioned, TWS will automate this process for
you so that you don’t have to focus on it.
Use the Order panel in the activity window to monitor your open trades. Notice the difference between
a domestic stock order and the ones created for overseas stocks with attached FX orders.
The stock component displays as usual denoted using an integer in the KEY column. This tells us that it is
a Parent Order. But the currency pair on the next line attached to the order tells us that this is a Child
Order belonging to the Parent.
When you submit your order to buy shares, the FX order will start to execute alongside the stock
transaction during the fill-time.
Upon full execution, the account window will show the long value for the shares priced in Canadian
dollars, but it will show a practically zero balance under total Cash. That’s because the long cash position
generated by the FX portion of the order has been used to settle the stock leg of the deal. Likewise,
when you sell the stock and attach an FX Order at the time of the closing trade, the FX position will
remain close to zero as the Canadian dollar proceeds are sold for US dollars.
See the IB website under Pricing<Interest and Financing and look for the currency you are borrowing in
under the listing of Interest Rates Charged to You on Margin Loan Balances. Use the Calculator to show
an estimate of daily borrowing costs.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Supporting documentation for any claims and statistical information will be provided upon request.
Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.