A Canadian LIC caters to mostly US-based customers and underwrites insurance policies in US dollars (USD). On the other hand, it maintains a portfolio of investments in Spain in euros (EUR). The current exchange rates are 1.25 CAD/USD and 0.75 EUR/CAD

In two months' time, it expects to settle claims worth 16 million USD and collect investment returns worth 18 million EUR. The LIC expects both foreign currencies to appreciate by 5 (Canadian) cents in next two months. Other risk parameters (interest rates, credit quality, liquidity issues, etc.) are not expected to change.

a) The FI is exposed to what risk event(s)? ____________________

b) At current prevailing rates, the net expected cash flow, in CAD, after two months = ____________________

c) However, if the two foreign currencies move as stated, the net expected cash flow, in CAD, after two months = ____________________

Answers (to last two parts only): 4 million CAD; 4.1 million CAD / Can someone explain how it is 4.1 CAD for part B?

Answer rating: 100% (QA)

a The FI Financial Institution is exposed to exchange rate risk events since it deals with multiple ... View the full answer