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How to Calculate Foreign Exchange Gain or Loss in a Basis Point

Original post by Bryan Keythman of Demand Media

Foreign currency exchange is the buying or selling of one country’s currency for another. A bank or dealer who conducts foreign currency transactions for customers typically quotes currency prices to four decimal places, the last of which is called a basis point, or pip. For example, it may cost $1.4023 to purchase one euro. In this quote, the “3” is one basis point. If your company sells products in another currency, you may experience a foreign currency exchange gain or loss if the exchange rate increases or decreases in basis points by the time you collect money on your invoices.

Step 1

Determine the amount of money for which you sell a product on credit in a foreign currency and the exchange rate at the time of the sale. For example, assume that a customer agrees to pay you 10,000 euros within 30 days for the purchase of your product and that the exchange rate is $1.2555 per euro at the time of the sale.

Step 2

Multiply the exchange rate by the amount of the sale to determine the amount of your account receivable in U.S. dollars. An account receivable is an amount a customer owes you. In this example, multiply 10,000 euros by $1.2555 to get a $12,555 account receivable.

Step 3

Determine the exchange rate at the time you collect the money on the account receivable. In this example, assume the exchange rate increased by 200 basis points to $1.2755.

Step 4

Multiply the new exchange rate by the original amount of the sale in the foreign currency to determine the value of the account receivable in dollars at the time of collection. In this example, multiply 10,000 euros by $1.2755 to get $12,755.

Step 5

Subtract the original value of the account receivable in dollars from the value at the time of collection to determine the currency exchange gain or loss. A positive result represents a gain, while a negative result represents a loss. In this example, subtract $12,555 from $12,755 to get $200. This represents a $200 foreign currency exchange gain due to the increase in basis points.

                   

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About the Author

Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.

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