or asset djt - b,t) = Dividend (per share) paid out at time t for period t-h through t Global Framework In the global framework we begin by defining exchange rates. Exchange rates are defined as the reporting currency over the base currency (reporting/base). The base currency is sometimes referred to as the risk currency. For example, USD/GBP would be the exchange rate where the reporting currency is the U.S. dollar and the base or risk currency is the British pound. Suppose a portfolio with USD as its reporting currency has holdings in German, Australian, and Japanese equities. The base currencies in this example are EUR, AUD, and JPY, respectively. The total return of each equity position consists of the local return on equity and the return on base currency. We assume that a generic portfolio contains N assets (n = 1, . . . , N). Let Pe(t) represent the local price of the nth asset at time t. For example, PfJ,t) represents the price, in euros, of one share of Siemens stock. X:(t) is the exchange rate expressed as the 2th currency per unit of currency ;'. For example, with USD as the reporting currency, the exchange rate Xt (t) = USD/EUR (i is USD and; is EUR) is used to convert Siemens equity (expressed in euros ) into USD. In general, the exchange rate is expressed as reporting over base currency. Note that this may differ from the way currency is quoted in the foreign exchange market. It follows from these definitions that the price of the nth asset expressed in reporting currency is Pn{t) = P^t)Xij(t) (20.25) We use equation (20.25) as a basis for defining the reporting return, local return, and exchange rate return. The total return of an asset or portfolio is simply the return that incorporates both the local return and the exchange rate return. Following directly from equation (20.25), an asset's reporting return, using percent returns, is defined as 2U*)=[l + Ki(f)][l+E*(f)]-l = ^(t) + Eii(t)+-Ri(t)xEii(t) (20.26) where R {t) = One-period total reporting return on the ?zth asset R*n(t) = One-period local return on the nth asset E (t) = One-period return on the ith exchange rate per unit of currency; E(t)=X(t)lX(t-l)-l