Actuarial Outpost > SoA EOM2: measuring CEx
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#1
05-24-2017, 11:54 PM
 Zaboor Member Join Date: Dec 2008 Posts: 79
EOM2: measuring CEx

I've written an answer explaining how the external forces will interact within each scenario and increase/decrease the sovereign and currency risks, but how do I quantify the increase/decrease?

I'm assuming the future scenario values of SSx are estimated using the sovereign spread regression model, but no model is given with regards to CEx.

#2
05-25-2017, 12:16 PM
 gcact Member Non-Actuary Join Date: Jan 2013 Studying for ERM College: FSU Posts: 1,609

You don't necessarily need to give a quantitative reasoning for why the currency risk would go up or down, but you need to give some explanation for the distribution you suggest.

They say it in the audiocast, they're not looking for you to be a futurist or a investments guy, they want you to be able to identify external forces and how they might shift the variables in question.
#3
05-25-2017, 02:28 PM
 Zaboor Member Join Date: Dec 2008 Posts: 79

So if I say something like "based on the above scenario developments I estimate an increase of 5 percentage points with a range of 2%", would this be sufficient? I feel this would get a DNMMR.

I'm worried the model solution will be like 10 pages but mine is only four or five.
#4
05-25-2017, 03:40 PM
 PassionVoid Member SOA Join Date: Dec 2014 Favorite beer: Bud Light, a lot of it Posts: 245

Quote:
 Originally Posted by Zaboor So if I say something like "based on the above scenario developments I estimate an increase of 5 percentage points with a range of 2%", would this be sufficient? I feel this would get a DNMMR. I'm worried the model solution will be like 10 pages but mine is only four or five.
I'm looking at my final submission and this is pretty much exactly what I did when I MMR'ed. I actually didn't even give a range, just a flat number with no basis for where the magnitude of that number came from.
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#5
05-25-2017, 04:25 PM
 Zaboor Member Join Date: Dec 2008 Posts: 79

Quote:
 Originally Posted by PassionVoid I'm looking at my final submission and this is pretty much exactly what I did when I MMR'ed. I actually didn't even give a range, just a flat number with no basis for where the magnitude of that number came from.
In the assignment, it explicitly states to provide "...reasonable ranges of each of SSx, CEx and Rx for each scenario"

Can I ask how long your report was compared to the model solution and did you have any equations, graphs, or excel tables in your submission?

I'm finding this module to be extremely vague compared to the first one.
#6
05-25-2017, 04:35 PM
 gcact Member Non-Actuary Join Date: Jan 2013 Studying for ERM College: FSU Posts: 1,609

Currency exchange risk comes with investing in a foreign nation. Why? Because the value of money might be different between the domestic company and the international investment.
What's changing in country X that is causing the value of its currency to go up/down relative the domestic nation? Answering that question should give you enough analysis to explain your posted CEx interval.
#7
05-25-2017, 05:15 PM
 Zaboor Member Join Date: Dec 2008 Posts: 79

Quote:
 Originally Posted by gcact What's changing in country X that is causing the value of its currency to go up/down relative the domestic nation? Answering that question should give you enough analysis to explain your posted CEx interval.
I understand the drivers of currency risk within each scenario, but am not sure how to justify a mathematical range for this value.

Can I just say something like in the bad scenario CEx is 6 to 8 percent? If so, then how is this different from saying CEx = (7 to 9) or (5 to 10) ?

The assignment doesn't provide any mathematical equation or model that I can use.
#8
05-25-2017, 07:04 PM
 gcact Member Non-Actuary Join Date: Jan 2013 Studying for ERM College: FSU Posts: 1,609

You don't need an equation, you're not expected to know how to calculate that information.
You're supposed to pitch to the client that there could be a change in that factor because of the things happening in the world in that scenario.

You literally can just say that you think CEx would be in range (x,y) because of h,j,k external forces. They don't ask for quantitative explanation of the calculations, just for you to provide a numerical range, then just provide some reasoning why your range is reasonable.
#9
05-25-2017, 07:07 PM
 gcact Member Non-Actuary Join Date: Jan 2013 Studying for ERM College: FSU Posts: 1,609

If you are having trouble justifying the range of numbers then look at the bonds being offered by countries experiencing hyperinflation. See how people investors those countries and then make your analysis.
#10
05-26-2017, 05:51 AM
 Zaboor Member Join Date: Dec 2008 Posts: 79

Thanks for all your answers today, just one final question before I submit:

The assignment asks "...under which future scenarios would you recommend the investment and under which would you walk away".

Since there are only two scenarios, do I basically just say the investment should be made in the God is Latin America scenario and not be made under the Disintegration scenario? I feel like I'm definitely missing something here.

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