Entering Overseas Stock and Currency Orders in Mosaic

Study Notes:

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 TSE listing 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 Parent order.

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.