MCT - Foreign Exchange Risk [BattleCard]
I think there needs to be an update the "Market Risk" calc problem: calculate MCT.CapReq for total market risk
There is text in the section that suggests calculating "foreign exchange risk" is not part of the exam:
foreign exchange risk (formulas removed from syllabus for Fall 2017)
The current MCT guide has a statement that says:
The foreign exchange risk margin is 10% of the greater of:
i.) the aggregate net long positions in each currency, adjusted by effective allowable foreign exchange rate hedges if any are used, and...
The guide does exclude the rest of the foreign margin section (5.2.2), but question 15 on Fall 2018 managed to ask for the foreign exchange margin question and seemed to disregard "carve-out" even though it probably should've been considered (liabilities are not provided directly).
A P&C insurer with a net open long position in a given currency may reduce the amount of the net exposure, to a maximum of zero, by the amount of a carve-out, which is equivalent to a short position of up to 25% of the liabilities denominated in the corresponding currency.
Candidate Note: It would be much easier as a candidate to include the WHOLE section (foreign exchange margin) and then test on it rather than pretend to exclude it (5.2.2+), but include a partial (but incomplete/inaccurate) calculation of the margin on the exam.
Comments
Hi,
Looking at the syllabus, 5.2.2 is out but 5.2.1 is still in the exam, which covers that which was tested in Fall 2018 (10% of greater of ...). It seems as though this is as much as they would like you to understand (i.e. disregard "carve-out" and such). Perhaps in the question on Fall 2018, because "carve-out" was not on the syllabus, there was an implicit assumption that there were no liabilities denominated in those foreign currencies.
Given the above, would you still recommend a clarification of this in the Battlecard? (perhaps only that the "10% of greater of ..." is covered?)
The BattleCard should be reformatted to include foreign exchange risk as a variable the user must calculate as presented in 5.2.1 (just assets - no liabilities) and allow the user to solve for ?. The equation on the bottom of the page where it states that: "formulas removed from syllabus for Fall 2017" should state the current 5.2.1 formula with a mention that references to "carve-out" were specifically excluded from the MCT readings (for Fall 2017).
Separate aside
The exam reference in this question was actually 30.66, which is included in the exam in its entirety (see Office of the Superintendent of Financial Institutions Canada, Sample Return, 2018 (Q1), Approved by the Canadian Council of Insurance Regulators – P&C-1). Which leave the candidate with a little confusion in relation to carve-out as it is included in P&C-1 but specifically excluded from MCT.
That makes sense. Thank you for the recommendation. Forwarding it to @graham.
Ok, I put the "?" back in for the foreign exchange risk, so you have to calculate it.
Hello @graham , following the discussion above, I think the formula in the battlequiz is missing the absolute value for the net spot position:
CapReq(ForX)= 10% x max (NSP - CO, 0)
NSP (Net Spot Position)= (foreign assets in $CAD) - (foreign liabilities in $CAD) <-- absolute value on the right hand side?
CO (Carve-Out)= 25% x (foreign liabilities in $CAD)
Thank you!
Yes, I believe you are correct. I went back to the MCT source reading and it says the NSP (Net Spot Position) is the sum of:
A simpler way of saying this is that the NSP is just the sum of the absolute value of (assets-liabilities) for each foreign currency.
Hi Graham,
Could you explain further about the statement above?
I currently understand NSP to be absolute value of Foreign assets in CAD - Foreign liabilities in CAD. But you also mention that it is the sum of the Net open long positions + the absolute value of the sum of net open short positions? Is that correct?
Thank you
Technically, these details shouldn't be asked on the exam anymore because section 5.2.2 has been removed from the syllabus and that's the section where that's covered. Unfortunately, not all the material on foreign exchange risk has been removed so it's a little confusing what they want to you know and what you can skip.
Anyway, please ignore what I wrote in that earlier post. I edited the information section in the web-based problem to hopefully make this more clear. Here's the link, then click on the first web-based problem in list of BattleCards.:
Hi graham, it seems that you edited the formula in the battle card but not the answer. The answer includes the amount of carve out. Thanks
Yes, I did forget to change the formula in the answer key. Thank you for letting me know. It's fixed.