Exchange gain or loss / Exchange gain / Exchange loss

Anything that changes in price represents a gain or loss for its owner. The result of the favorable exchange rate change for us is the exchange rate gain.

If the exchange rate of the US dollar expressed in euros changes from the previous 1.01 to 1.02, then the euro will weaken and the dollar will strengthen at the same time. In the case of a weakening euro, the value of revenues generated in dollars (e.g. exports) expressed in euros increases. This is purely due to the exchange rate change. In addition, those whose costs are incurred in dollars (for example, you imports raw materials) will increase their expenditure expressed in euros. 

In the opposite case, if the euro strengthens (i.e., for example, you no longer have to pay 1.02, but only 1.01 euros for one dollar), then the value of the revenue in dollars expressed in euros decreases. The reason for this is again the exchange rate change itself. And if you have costs in dollars, the value of the expenditure expressed in euros will be lower as a result of the strengthening of the euro.

In a similar way, it is also possible to realize exchange rate gains or losses on securities. A typical example of this is the profit or loss resulting from changes in shares prices. When selling a security, the difference between the sell rate price and the buy price paid when buying the security is the exchange rate gain or exchange rate loss. As with currencies, securities do not have any guarantee of exchange rate gains. This is why investing in shares is considered risky.

It is clear from all this that, on the one hand, we cannot influence the occurrence of exchange rate changes. On the other hand, the change that occurs can be equally favorable or unfavorable for us. No matter how attractive the possibility of exchange rate gain gains may seem, precisely because of its uncertainty, a company that gives something to itself does not start speculating. Uncertainty here means that the risk of loss must also be taken into account. A responsibly operating company does not take on a situation where it loses its marketable products and services, or part of it, due to exchange rate risk. 

The risk of exchange rate changes can be limited through a hedging transaction concluded with a bank or brokerage firm. The purpose of the hedging transaction is to protect against the risk of the existing exposure (this is called an open position) by opening a position in the opposite direction.

Of course, there are players on the in money and capital markets who seek to take advantage of exchange rate changes. They open various forward positions in accordance with their expectations regarding the future development of market prices. This can be a buy (long term) position or a sell rate (short term) position. This can happen during the trading of shares, bonds, or forward FX contracts, currency futures.

Exchange rate gain gains on securities are typically taxable income. When converting currencies, the profit arising from the currencies rate difference is generally tax-free if it is not generated in the context of a business-like activity.