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

An Indian reinsurer holds US dollar-denominated claims liabilities and has matched them with dollar assets. The rupee is under a managed float and then depreciates sharply against the dollar. Which statement is correct about the reinsurer's rupee-reported position, assuming assets and liabilities are exactly equal in dollars?

The net position is unchanged. With dollar assets exactly equal to dollar liabilities, a depreciation of the rupee increases both by the same percentage in rupee terms, so the surplus stays zero. Currency matching removes exposure to exchange rate movements regardless of regime.

  1. AThe rupee value of assets rises by more than liabilities, creating a surplus
  2. BThe rupee value of liabilities rises by more than assets, creating a deficit
  3. CAssets and liabilities rise by the same proportion, so the net position is unchangedCorrect
  4. DBoth assets and liabilities fall in rupee terms
  5. Only the liabilities are revalued, because assets are held at cost

Explanation

If dollar assets equal dollar liabilities, a rupee depreciation raises both by the same percentage in rupee terms. The net exposure is zero, which is the purpose of currency matching. Options claiming a surplus or deficit would require a currency mismatch.

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