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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

An Indian insurer holds US dollar bonds. If the rupee appreciates against the dollar while the dollar value of the bonds is unchanged, the effect on the rupee value of the holding is:

The rupee value of the holding falls. When the rupee appreciates, each dollar converts into fewer rupees, so a bond portfolio with an unchanged dollar value is worth less in rupees to the Indian insurer unless the currency exposure has been hedged.

  1. AIt rises, because the dollar is stronger
  2. BIt falls, because each dollar now converts into fewer rupeesCorrect
  3. CIt is unchanged, because the dollar value is fixed
  4. DIt rises, because the rupee is stronger
  5. It falls only if US interest rates rise

Explanation

Rupee appreciation means one dollar buys fewer rupees. A fixed dollar value of bonds therefore translates into a lower rupee value. The insurer faces a translation loss unless it has hedged the exposure.

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