What are Revaluation Rates?
Revaluation rates are market rates from a specific point in time that are used as a base value by traders to assess whether a profit or a loss has been realized for the day or overall. In most cases, the revaluation rate is the closing rate for the previous trading day.
Revaluation rates are often referred to as "reval rates." The term is primarily used in the currency markets in regards to currency rates, but could also be referenced in other markets as well.
- A revaluation rate is a rate used to assess performance at specified time intervals, often the end of the day.
- Revaluation rates are also called reval rates.
- The term is commonly associated with the currency market, but the concept applies to other markets as well.
Understanding Revaluation Rates
Revaluation rates show the change in value of a position or portfolio at a given point in time.
For example, in order to assess how much profit a currency trader made today, they would use yesterday's closing rate (today's revaluation rate) of 1.1500 EUR/USD as a baseline for comparing today's closing rate of 1.1550 EUR/USD. The rate increased by 50 pips, which can then be used to determine the profit made on the day.
Many equity and bond portfolio managers will use the daily WMR/Reuters rates to revalue their portfolios. The WMR rates are calculated using an average rate over a one minute trading period, which is 30 seconds before and 30 seconds after 4 pm London time. By doing this, the portfolio manager is able to give investors a precise value of the portfolio at the given time interval.
Equity portfolio managers are able to show how much their fund gained or lost on the day by comparing the values of the fund at the specified time. For example, the value of the fund yesterday at the close versus today at the close.
The revaluation rate is important for retail investors in that if a position they have is revalued at a significant loss the investor might be margin called and be required to further fund their account if they wish to continue holding the position. Brokers will regularly revalue positions at the close of the day, and issue margin calls to those in violation of their margin requirements.
Example of a Revaluation Rate in the Currency Market
Several days ago a trader sold the EUR/USD with a position of $100,000. The last closing price was 1.1450.
The trader continues to hold the position overnight and through the next day. At the close the following day, the rate is 1.1425. The prior day's close, 1.1450, is the revaluation rate used to assess the position's profit (or loss).
The revolution rate reveals that the trader made $250 on the day (1.1450 - 1.1425 x $100,000), or 25 pips.
Note that this is the daily profit or loss. The total profit or loss on the position could be much different. For example, if they sold at 1.1350, they are losing $750 on the position (1.1350 - 1.1425 x 100,000). The revaluation rate can be used in both situations.