5.3 Market risks

5.3.6 Currency risk

• L1-123. The Currency risk charge is equal to the higher of the aggregated losses incurred under two stress scenarios on the exchange rates between the IAIG’s reporting currency and those currencies in which the IAIG holds assets or liabilities. The prescribed stresses are applied to the net open position determined for each relevant currency.
• L1-124. The net open position in a currency takes into account all direct and indirect exposures to that currency. Where relevant, an amount corresponding to jurisdictional capital requirements in that currency, subject to a cap, may be deducted from the net open position.
• L1-125. The two stress scenarios are:
  • a) Scenario 1: All of the currencies in which the IAIG has a net long position decrease in value against the reporting currency, while all of the currencies in which the IAIG has a net short position remain unchanged; or
  • b) Scenario 2: All of the currencies in which the IAIG has a net short position increase in value against the reporting currency, while all of the currencies in which the IAIG has a net long position remain unchanged.
• L1-126. Within each scenario, the losses by currency are aggregated using a correlation formula, as described in the Level 2 text.
• L1-127. The prescribed stresses for each currency pair, the aggregation formula, as well as the rules applicable to the determination of net open positions, are specified in the Level 2 text.
• L2-230. In order to determine the Currency risk charge, the IAIG determines its net open position for all currencies other than the reporting currency. The net open position for each currency is calculated as the sum of the following:
  • a. The net spot position, defined as all assets less liabilities, including accrued interest and accrued expenses;
  • b. The net forward position, defined as all net amounts under forward foreign exchange transactions, including currency futures and the interest and principal on currency swaps;
  • c. The delta equivalent amounts of currency options;
  • d. Guarantees and similar instruments that are certain to be exercised and are likely to be irrevocable;
  • e. At the discretion of the IAIG, net future income and expenses not yet accrued but already fully hedged;
  • f. Any other item representing a profit or loss in the foreign currency;
  • g. Minus the amount of capital required locally to support the activities in the foreign currency, subject to a cap of 10% of net insurance liabilities in that currency.
• L2-231. The deduction referred to in point g) of paragraph L2-230 is applied to long positions only and does not change any long position to a short position. This deduction applies only if the IAIG has operations in the jurisdiction of the foreign currency.
• L2-232. The net open currency position excludes assets that are fully deducted from capital resources, and liabilities that qualify for inclusion in consolidated capital resources.
• L2-233. The net insurance liability reported for each currency consists of the current estimate net of any reinsurance assets, plus all deferred tax assets and liabilities associated with the current estimate and reinsurance assets.
• L2-234. Forward currency positions are valued at spot market exchange rates as at the reporting date.
• L2-235. The Currency risk charge is equal to the higher of the aggregated losses incurred under the following two scenarios:
  • a. Scenario 1: all currencies in which the IAIG has a net long position decrease in value, while all of the currencies in which the IAIG has a net short position remain unchanged. The amount of the decrease of each foreign currency relative to the reporting currency is found in the currency stress matrix in Table 20 below. The decrease for currency pairs not listed in Table 20 is 60%.
  • b. Scenario 2: all currencies in which the IAIG has a net short position increase in value, while all of the currencies in which the IAIG has a net long position remain unchanged. The amount of the increase of each foreign currency relative to the reporting currency is found in the currency stress matrix in Table 20 below. The increase for currency pairs not listed in Table 20 is 60%.
• L2-236. For each scenario, the losses by currency are aggregated using a correlation formula for which the assumed correlation of losses between each pair of foreign currencies is 50%.