This question is under Chapter Solvency Assessment (2) Page 18 Standard formula calculation Context: Market Risk Module: 25% stress to property values both an immediate 25% increase in the value of the currency and an immediate 25% decrease in the value of the currency Question: How is the second stress applied? Why are we applying an immediate increase followed by an immediate decrease, Instead of applying a net stress? Ex: On 1000 applied +25% stress becomes 1250 and then -25% stress on it becomes 937.5.
Hi Rahul, It is actually saying that two stresses are applied and the one with the greatest impact is the capital required. This is the same for the interest rate stress. - So apply a 25% increase in the value of the currency to the base scenario - what is the required capital? - then separately apply a 25% decrease in the value of the currency to the base scenario - what is the required capital? The higher of the two is the capital requirement for the currency stress. Hope that helps. Rachael
Hi Rachael Sorry, I am not really following. Would you be able to provide a numeric example to explain how you would go about this? Thanks
It is simply as Rachael has described: (1) Recalculate the value of assets and value of liabilities (either or both of which might have components that are denominated in another currency) under a 25% appreciation of the currency. Then the difference between the base {A - L} and {A - L} under the currency change is the required capital for that particular stress (upward). (2) Repeat, but instead apply a 25% depreciation of that currency against the domestic currency. Required capital = max of (1) and (2) results
