Perhaps the best known model to reflect the attribution effects due to currency is the one developed by Denis Karnosky and Brian Singer, both formally of Brinson Partners. The fact that they worked with Gary Brinson is probably part of the reason for its tie in with the Brinson equity models. The K/S model is actually quite flexible and can be adapted to any attribution model, including fixed income models, though little has been written about this. This is “on my plate” to do in the near future.

Two important features of the K/S model should be emphasized. First, on the market side (where we look at the traditional effects one might find from a Brinson (e.g., Brinson-Fachler) model, for example) we use local return premiums rather than merely local returns. That is, we back out the risk-free rate from the returns, as this rate ends up on the currency side.

Second, we show two attribution effects for the currency side: the contribution from the underlying assets (that is, the impact simply due to changes in the FX rates on the assets in the portfolio over the period) and from currency forwards (that arise from our employment of various forward strategies). While one might want to lump these effects together, separating them provides the reader with a much better insight into what has occurred in the portfolio.

If, for example, we don’t employ any hedging, then all of the effects would presumably come from the underlying assets. If, however, some hedging is taking place, then we would see how each is contributing to our excess return.