I am backtesting a model that trades currency crosses (i.e. EurGbp) at a fixed $1 mln per trade and was curious if I need to a) account for my currency exposure to GBP on both ends of the trade or b) only upon exit?
for example with a long EurGbp Signal:
a) Use $1 mln USD to buy GBP which I then sell in order to Buy EUR, then upon signal to exit the trade, sell the EUR and purchase USD
b) simply track the EurGbp trade performance then convert back to USD on trade exit
Option a is clearly more realistic in terms of trading; however, the 'pure' model signal is to some extent distorted by the currency risk taken to leg into and out of the FX cross.
Any insights are much appreciated!