Solvency 2 - market risk

Discussion in 'SA2' started by i-actuary, Apr 2, 2020.

  1. i-actuary

    i-actuary Active Member

    Hi all,

    i am having some questions
    For 2 purposes int rate risk has the up and the down.
    so we value the liabilities with:
    base rf, up , and down (as prescribed by eiopa - lets forget VA, MA etc) . So Delta Liab up and Delta Liab down.
    Now when we go to do the same for the assets.
    in order to find the Delta Assets up and Delta assets down we need the MVAdown MVAup (and ofcourse the MVA which lets say we know it from bloomberg reuters etc).
    Question 1.
    if i take the CFs of the bonds and discount them with the up and down it will give me two values which i doubt they correspond to the values that should be compared with the MVA
    Question 2 .
    continuing from Q1 if q1 is a "yes" then my question is that in order to be consistent then if i discount the CFs of the bonds withthe rf it should give the MV which ofcourse it is not the case bc of the spreads.

    Q 3
    So should we apply for all scenatios (up down ) the spread (zero spread?) and then see the MVA up and down ?

    should we use the rf curves with the ufr or before the extrapolation for bonds?

    thank you
  2. mugono

    mugono Ton up Member

    Your questions, taken together suggest that you may be muddling the concepts underlying the assets and liabilities.

    Q1 &2
    Asset side: the unstressed (i.e. base) market value will equal the CFs of the bond(s) discounted at the gross redemption yield (GRY). The GRY is the rate to get you back to the base market value. The GRY can be decomposed between a risk-free element and a spread.

    Change in basic own funds (interest rates): In the standard formula, each stress is applied on a univariate basis. The interest rate module sets out an up and down stress. This is applied to the liabilities and assets exposed to rate risk. The change in basic own funds in the up and down interest rate stress is compared and the result that generates the largest loss of own funds is chosen as the capital requirement.

    Change in basic own funds (spread risk): A spread (widening) stress will impact the value of the assets exposed to spread risk. There will also be an impact on the value of the liabilities where the regulations allow some of the change in spreads to be reflected in the liability value (e.g. where a matching adjustment applies). The spread related capital requirement will then be equal to the loss of own funds.

    The ultimate forward rate (ufr) is relevant for valuing liabilities (not assets).

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