Kamala Gupta, a currency management consultant, is hired to evaluate the performance of two portfolios. Portfolio A and Portfolio B are managed in the United States and performance is measured in terms of the US dollar (USD). Portfolio A consists of British pound (GBP) denominated bonds and Portfolio B holds euro (EUR) denominated bonds.
–
Can someone please comment on my logic: Because portfolio A consists of GBP bonds, the return on that portfolio should be in terms of USD / GBP (aka GBP is the base?)? Even though the portfolio performance is said to be measured in USD?
So when calculating (1+Rfc)(1+Rfx)=Rdc, we calculate Rfx by looking at the change in the USD / GBP rate?
Thanks in advance!!