Creating a Foreign Currency Risk Rating Methodology using Monte Carlo Simulation

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Presented by

James McNichols, Consulting Actuary at AYA Consultants

About this talk

Nearly every company doing business beyond its own borders faces the challenge of cost effectively managing currency translation risk. Each year, corporations incur significant currency-related losses due to global currency volatility. Companies that do not manage their FX risk exposure effectively incur earnings impairment which is capital dilutive. Application of the fundamental Enterprise Risk Management (“ERM”) principals of risk pooling; proportionate risk sharing; and rank correlation, yields a structured insurance solution which results in equitable pricing and yields lower overall capital requirements, which is accretive to book value. This webinar will walk through the development of risk rating methods to measure and manage the accretive ERM value of retaining FX risk exposure through a structure insurance program. The methodology has evolved over the ten-year history of an actual captive insurance program which provides equitable premium rates to policyholders and yields risk reduction 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.

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