Learn how divergence due to base currency affect your investments in DARWINs.
Lets say you are an investor with the euro as your Wallet currency.
However, when going to your portfolio, you notice that the DARWINs you have invested in, or some of them, have a different base currency than yours.
Does this affect you? The answer is yes.
How exactly it affects you is the topic of this article and for explaining it we have prepared this spreadsheet.
Put yourself in the situation of having invested 1000 euros in a DARWIN that trades in US dollars and is about to make its first trade after starting to be listed on the DARWIN Exchange. It is quoted at 100 as every new Darwin.
The first trade this DARWIN is going to replicate is a trade in the audyen with a leverage of 1 to 5. In order to achieve the same leverage as the DARWIN, you, because you are trading in euros, have to buy a slightly larger volume of the asset as the Darwin trading in US dollars. You buy at the same price and close the trade at the same price.
What does change, however, while the trade is open, is the value of the euro against the japanese yen, while the value of the US dollar against the japanese yen does not change. This accounts for a difference in the return after converting the return to euros and to US dollars. So, in spite of having closed the trade with exactly the same pips, the DARWIN trading in euros has a slightly lower return.
How much lower? Well, variation of the return between the trade made in euros and the trade made in dollars is exactly the same as the variation of the eurodollar.
You can download the spreadsheet from a the link you can find in the description of this video in order to see yourself how a change in the value of the euro against the japanese yen, while the trade is open, affects return divergence.
Let's sum up the takeaways
- When replicating DARWINs' trades, you will always trade in the currency of your Wallet, even if you have invested in a DARWIN with a different base currency.
- Base currency divergence only affects profits. If the DARWIN makes a winning trade, your replication of the trade cannot become a losing trade due to base currency divergence.
- The only variation that counts is the one occurring while the trade was open. Any variation before or after the trade has absolutely no effect on divergence.
- When all trades of a DARWIN have a similar duration, divergence due to base currency will be aleatory: sometimes it will benefit you, sometimes not.
- When duration of trades is very long (weeks or months), divergence due to base currency can be higher than usual.