A foreign share rises by ten per cent, yet the value shown in your home currency barely changes—or falls. There is no contradiction. The share price and the exchange rate both affect the result when you translate an unhedged foreign investment back into another currency.
Keep the units visible throughout the calculation. Exchange-rate quotes can be written in either direction, and using the wrong direction can reverse the result. The example below is hypothetical and excludes dividends, fees and tax.
Follow the money through two conversions
Suppose one unit of your home currency buys two units of the foreign currency. You convert 100 home units into 200 foreign units and buy a share. Later, the share is worth 220 foreign units, a ten per cent increase.
If one home unit now buys 2.5 foreign units, converting the sale proceeds gives 220 divided by 2.5, or 88 home units. The share rose in its trading currency, but the home-currency value fell by twelve per cent. The foreign currency weakened relative to your home currency.
If the exchange rate instead remained at two foreign units per home unit, the proceeds would be 110 home units. Changing only the exchange-rate assumption makes the source of the difference easy to see.
Include the costs that the simple example leaves out
Actual results depend on conversion spreads, dealing fees, dividends, withholding taxes and other charges. Dividend payments may be converted at different dates from the purchase and sale. Keep these cash flows separate before calculating a total return.
The SEC’s international-investing overview identifies currency changes among the additional risks investors should understand. It is written for US investors; local tax and investor-protection rules require jurisdiction-specific checking.
Trading currency is not the whole exposure
A company can sell products in several currencies while its shares trade in one. Its business exposure and your conversion exposure are related but different. Likewise, a fund’s display currency does not by itself tell you whether its underlying currency exposure is hedged.
Read the fund or security documentation rather than assuming that a home-currency price removes exchange-rate effects. Hedging has its own costs and limitations and does not remove all investment risk.
For your research notes, record the purchase currency, home-currency conversion rate, cash flows and final valuation date. A clear calculation helps explain a result; it does not predict the next exchange-rate move or establish that an overseas investment suits your circumstances.