First, recall from the section on computing returns that the return from holding a foreign currency from period t - 1 to t is Et (?) = [X( (?) - Xt(t - 1)]/Xt(t - 1). Next, let FR(t) represent the forward exchange rate (expressed as reporting over base currency) at time ? - 1 for forward delivery at time ?. Rewrite the currency return at t - 1 for ? as x^t)-mt)+mt)-x^t-\) X,y(?-1) Since the return is computed at t - 1, X (?) is uncertain and, therefore, so is Et (?). It follows from (19.59) that the uncertain currency return consists of two parts: currency surprise, s(?), and forward premium, fp(t): E,j(t)= sjt) + fp(f) (1960) Currency surprise Forward premium where s(t) = [Xt}{t) -FR{t)\lXit- 1) fp(t) = [FR(t)-X:)(t-l)]/Xir(t-l) Note that the currency surprise is unknown at t - 1 whereas the forward premium is known. Therefore, return attribution that incorporates contributions from currency should clearly measure contributions from currency surprise only. One should not attribute a portion of currency return to something that is known beforehand. When computing contribution, we can simply substitute (19.60) into (19.58) and get the contribution from the currency surprise. Because the value of active management lies in its ability to forecast the uncertain sources of return, performance attribution should focus on the ability to capture positive returns due to currency surprise. The term wm{t - l)Txc(?) captures the contribution to the portfolio's return from the interaction between exchange rates and the portfolio's local return. Asset Grouping Methodology In order to derive expressions for international equity portfolios based on the asset grouping methodology, we need the following definitions. w bc(t - 1) cth country's weight in the benchmark portfolio wp(t - 1) cth country's weight in the managed portfolio rcb{t) cth country's total return as constructed in the benchmark portfolio tb{t) cth country's local return as constructed in the benchmark portfolio £c{t) cth country's local return as constructed in the managed portfolio £ At) local return as constructed in the benchmark portfolio Using these definitions, we can construct contributions to a portfolio's return by country, currency, investment style, industry, sector, and asset. While the results