Assume once again that the USD to CAD exchange rate is 1.30, but this time you want to buy 100 shares of ABC Corp at US$100 per share. You’ll pay CA13,000 excluding commissions (100 shares × US$100 per share × 1.30).
At the time of purchase, your total portfolio value will be CA$13,000. This value will change based on the share price of ABC Corp and the USD to CAD exchange rate.
If ABC Corp rises to US$105 per share, and the Canadian dollar weakens to an exchange rate of 1.35, you benefit from both the rise in stock price and the currency fluctuation. Your shares are now worth US$10,500 ($10,000 + $500), or CA$14,175 ($10,500 × 1.35). That’s a gain of CAD $1,175 ($14,175 − $13,000).
On the other hand, if the stock price drops to US$95, your loss can be offset by the gain from a weakening Canadian dollar. Your shares would drop by $500 to US$9,500, or CA$12,825. That’s a loss of CA$175 ($13,000 − $12,825), despite the US$500 drop in stock price. In this scenario, currency fluctuation helps to reduce the loss.