Creating a Foreign Currency Risk Rating Methodology using Monte Carlo Simulation

Presented by

James McNichols, Chief Actuarial Officer at Fleming Reinsurance

About this talk

Nearly every company doing business beyond its borders faces the challenges of cost-effectively managing currency risk. Each year, corporations incur billions of dollars in currency-related losses due to global currency volatility. Companies that do not manage their foreign currency translation (FX) risk exposure effectively may incur earning impairment which is capital dilutive. Application of the fundamental ERM principles of risk pooling; proportionate risk sharing; auto-regression; and rank correlation, yields a structured insurance contract that results in equitable pricing and yields lower aggregate capital requirements, which is accretive to book value. This webinar will highlight the development of risk rating methods to measure and manage the accretive ERM value of retaining FX risk exposure. The methodology has evolved over the ten-year history of an actual captive insurance program and has demonstrated equitable loss funding for retained risk on an aggregate basis through the application of credible predictive actuarial techniques. Specifically, we apply stochastic differential equations in comparison of financial models with levy processes using Markov chain Monte Carlo (MCMC) simulation techniques. The presentation will conclude with a teaser that outlines how this risk rating methodology may be applied to US Recession risk exposure.

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