There are two ways of calculating Currency Contribution.
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Difference between domestic return and local return (index + security selection).
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Exchange rate change ( 1 + capital gains + yield )
Is the capital gains in local currency or domestic currency? Example 2 on page 201 in CFA curriculum is confusing the heck out of me (havent seen any errata so far). Unless I use CG in domestic currency (4.76% for Japanese stocks) and apply the exchange rate change (-5%) I dont get -5.24%. So should I be using CG in DC? that does not make any sense if the purpose is to figure out r in DC. Help pls
I think your error is in this statement:
" that does not make any sense if the purpose is to figure out r in DC"
You are calculating the exchange rate contribution ( return ) in DC i.e. from the perspective of the investor whose currency is dollars.
That investor made 10% in Yen terms.
But he lost 5% in currency terms from his own perspective ( dollar perspective ). If he had been a Japanese investor he would be very happy with the 5% depcreciation in Yen and his investments were in dollars , but lets not stray from topic.
So 10% less 5% in geometric terms then de-geometrified shows the effect of curency loss which is 5.24% loss.
i.e. ( 1.1/1.05 - 1 ) - .1 = - 0.05238
It is as though he invested his 10% gain in a long Yen contract and lost 5% so his net return was 4.76% . Du to Yen movement he lost 5.24% of the 10% Yen gain