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Amirsani, Here couple points how I would proceed: I would first look to divide your time series into different clusters, enough so that different market dynamics fall into different clusters. I guess you will not be trading a single asset and thus you will not just optimize over a single stock or options contract. I would strongly try to discourage from ...

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You are not doing anything wrong. You just need to multiply the absolute return by the currency conversion factor. Example: You trade 200,000,000 yen notional and generate a return of 16% on that notional, then simply multiply 32,000,000 jpy gain by your conversion factor 0.0126 to yield a return of 403,200 USD. The return of 16% was generated on the ...

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From a practical standpoint, the conversion rate can be kept constant during the day. It won't be precise, but it'll be fast. Stat arb backtesters have plenty of precedent where the entry price is the day's close plus a slippage factor. So if your goal is adversarial research (where there question is "would this strategy work?"), then you could add a ...

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There are two factors here, which might or might not be conflicting. 1) You want to mimic what will happen in production. If your production system sweeps currencies once a day, then backtest that way. If your clearing broker only calculates margin at the end of the day, then do the same in backtests. If you will only resize your portfolio once a month, ...

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The best approximation of EUR/USD crossrate is probably Deutsche Mark - USD. However you need to be careful for the period around the creation of the Euro: due to the exchange rate mechanism European currency rates aren't really fully market-based. I assume you are aware of the Bretton woods system so won't talk about caveats in using currency data too far ...

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Compounding the monthly excess returns won't provide the annual excess return. You need to compute the difference between the annual return of the portfolio and the annual return of the benchmark. To illustrate this let's look at an example. Consider the following two situations: The benchmark performs well with a $2\%$ return each month; The benchmark ...

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