Multi-currency Attribution
The secret of being a bore is to tell everything.
Voltaire (1694-1778) Sept discours en vers sur l’homme, 1738
Multi-currency attribution is generally accepted to add several layers of additional complexity to an already complex and controversial area. Many of us have the luxury of ignoring multi-currency issues in single currency portfolios or perhaps the currency decision is simply an implicit decision within the asset allocation process. However, for genuinely multi-currency investment decision processes we must face these issues head on. These issues include but are not limited to:
1. The compounding effects of market and currency returns.
2. Interest rate differentials.
3. Unrealised gains losses in forward currency contracts.
4. Securities denominated in currencies other than the currency of economic exposure.
Early papers addressing multi-currency attribution include Allen (1991) which offers a geometric approach and Ankrim and Hensel (1992) which is arithmetic.


Ankrim and Hensel recognised that the currency return is comprised of two components: the unpredictable “currency surprise” and the predictable interest rate differential or “forward premium” between the appropriate currencies.
Let 369 = the spot rate of currency i at time t and = the forward exchange rate of currency i at time t for conversion through a forward contract ...

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