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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

An Indian life insurer sells policies in rupees but invests in US assets worth $2 million, unhedged. The rupee moves from ₹80 to ₹84 per dollar. What is the effect on the rupee value of the assets, ignoring any change in dollar asset prices?

The assets rise by ₹8 million. They were worth $2m × ₹80 = ₹160m and are now $2m × ₹84 = ₹168m. Rupee depreciation raises the rupee value of unhedged dollar assets, which benefits the insurer while liabilities stay in rupees.

  1. AIncrease of ₹8 millionCorrect
  2. BDecrease of ₹8 million
  3. CIncrease of ₹4 million
  4. DDecrease of ₹4 million
  5. No change, because the assets are in dollars

Explanation

Initial value is 2m × 80 = ₹160m. New value is 2m × 84 = ₹168m. The gain is ₹8m because the rupee depreciated. Option ₹4m uses the change in rate without the $2m scale; the decrease options have the wrong sign.

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