Answers to the European Commission on the ... - Eiopa - Europa

Currency risk
B.101 (Currency risk relates <strong>to</strong> bonds, real estate and liabilities and will be
considered, provided a given threshold on <strong>the</strong> basis of current values is
exceeded. Due <strong>to</strong> difficulties in denomination, fur<strong>the</strong>r analysis is
needed <strong>to</strong> determine whe<strong>the</strong>r currency risk of shares should be
addressed.)
B.102 Currency risk could be addressed through a scenario-based approach.
For <strong>the</strong> <strong>to</strong>tal foreign currency position, and taking account of <strong>the</strong>
applicable investment policy, <strong>the</strong> institution has <strong>to</strong> determine <strong>the</strong> effect
on <strong>the</strong> surplus of a fall in value of all o<strong>the</strong>r currencies against <strong>the</strong> euro
of for example 25%.
B.103 Alternatively, in a fac<strong>to</strong>r-based approach, risk fac<strong>to</strong>rs may be derived
for different currencies assuming normal distributions.
Risk concentrations
B.104 Concentration effects could be taken in<strong>to</strong> account by adjusting risk
fac<strong>to</strong>rs or increasing volume measures. Since concentration results in
more 'dangerous' distributions, adjusted risk fac<strong>to</strong>rs might be based on
higher moments (e.g. skewness). For <strong>the</strong> sake of simplicity of <strong>the</strong>
standard formula, however, <strong>the</strong> choice of increasing volume measures
appears more practicable. For example, a certain percentage of <strong>the</strong>
amount of bonds of a single issuer which exceeds a given limit might
be added <strong>to</strong> <strong>the</strong> corresponding volume measure.
Credit risk
B.105 A combination of rating agency analysis (<strong>to</strong> establish <strong>the</strong> ratings
buckets) and market information (reflected in <strong>the</strong> credit spread) could
be used <strong>to</strong> model credit risk. A separate credit spread multiplier could
be applied for each rating bucket. An example of such an approach has
been chosen by <strong>the</strong> FSA:
C = CS × Dur × Fac<strong>to</strong>r
i
where:
i
i
j
Duri = <strong>the</strong> duration of corporate bond i; and
Fac<strong>to</strong>rj = multiplier for rating bucket j, <strong>to</strong> which corporate
bond i has been assigned.
CSi = The credit spread for corporate bond i
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