Currency Risk in Capital Adequacy

In this paper we analyze currency risk for an insurance company in the context of capital adequacy. We discuss the difference between translation and structural currency risk and show how a zero-currency-risk benchmark can be chosen in a natural way. We show that by aggregating risk in a particular artificial currency, a currency basket, translation risk can be eliminated and the capital position of the insurer can be decomposed in a way that makes the calculation of currency risk tractable.