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Use a consistent quote direction
The fictional investor starts with 100 foreign units of asset value. The exchange quote is 7.8 domestic units per foreign unit. Initial domestic value is 780. The asset grows 10% locally to 110 foreign units, while the quote falls to 7.41.
Convert the ending amount
Ending domestic value is 110×7.41 = 815.1. Relative to 780, the gain is 35.1 and return 4.5%. Equivalently, 1.10×0.95−1 = 4.5%.
| Component | Contribution |
|---|---|
| Local asset return | 10 percentage points |
| Currency movement | −5 percentage points |
| Interaction | −0.5 percentage points |
| Domestic return | 4.5% |
Explain the omitted term
Simply adding 10% and −5% gives 5%, which omits −0.5 percentage points. The currency change also acts on the local asset growth. The endpoint conversion independently checks the multiplicative expression.
Keep income and costs consistent
The local total return is assumed to reflect the case’s complete asset wealth treatment. No hedge, conversion spread, fee or tax is modeled. Introducing those items changes the endpoint wealth and needs an explicit record rather than an automatic subtraction of a vague cost percentage.