What Are Revaluation Rates?
The term "revaluation rates" refers to rates that are commonly used to determine the performance of currencies. Traders use these market rates to assess whether a currency realizes a profit or loss at any point period of time. The revaluation rate is primarily considered the closing rate for the previous trading session. Although they are commonly used to reference currency rates in the currency market, they are also used to describe rates in other markets.
- Revaluation rates show the change in a currency, investment, or portfolio's value at any given point in time.
- Revaluation rates help traders assess the performance of currencies at specified time intervals, and are primarily considered the closing rate for the end of the most recent trading day.
- Revaluation rates are also called "reval rates".
- Although the term is commonly associated with the currency market, the concept also applies to other markets as well.
- Portfolio managers can show profits and losses by comparing fund values at a specific time.
Understanding Revaluation Rates
Revaluation rates show the change in a currency, investment, or portfolio's value at any given point in time. In order to assess a trader's profit or loss, they use the closing rate from the day before (today's revaluation rate) as a baseline for comparing today's closing rate. If the rate increases, the trader makes a profit. If it drops, they experience a loss.
Many equity and bond portfolio managers use the daily WM/Reuters rates to revalue their portfolios. These rates are calculated using an average rate over a one-minute trading period, which is 30 seconds before and 30 seconds after 4:00 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.
WM/Reuters was previously known as WM/Refinitiv, but changed its name in November 2020.
Equity portfolio managers are able to show how much their fund gains or losses by comparing the values of their fund at the specified time, such as the closing value of the fund yesterday compared to its closing value today.
The revaluation rate is important for retail investors. That's because if a position is revalued at a significant loss, the investor may be margin-called. This means they may be required to further fund their account if they wish to continue holding the position. Brokers regularly revalue positions at the close of the day and issue margin calls to those who violate their margin requirements.
Revaluation is a calculated move that happens when a country's official exchange rate is adjusted upward compared to a specific baseline.
Example of Revaluation Rates
Here's a hypothetical example to show how revaluation rates work in the foreign exchange market. Let's say a trader has a position in EUR/USD worth $100,000 and notices the last closing price for this currency pair was 1.1450. At the close of the following day, the rate changes to 1.1425. The prior day's close (1.1450) becomes the revaluation rate used to assess the position's profit or loss. The revolution rate reveals that if the trader sells that day, they make $250 (1.1450 - 1.1425 x $100,000), or 25 pips.
Note that this example uses the daily profit or loss. This means that the revaluation rate can be used in both situations. The total profit or loss on the position could be much different. So if the trader exited their position at 1.1350, they lose $750 (1.1350 - 1.1425 x 100,000).