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Exchange Rates and Risk at an Insurance Company

Because our world operates, for the most part, on floating interest rates, businesses are constantly at risk of losing huge amounts of money due to unfavorable movements in exchange rates. Obviously, an organization does not want to make a nice profit on a sale to an international customer only to see that profit is eaten away by exchange rate movements. Because this common problem faces every organization in the world that has a customer or supplier outside their own country, various tools and markets have been created to help control the risks.

If you were in charge of exchange rates at an insurance company, what would you do to mitigate the risk?

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Risk is the uncertainty that you may not earn your expected return on your investments. For example, you may expect to earn 20% on your stock mutual fund every year. But your actual rate of return may be much lower. Multinational firms must constantly assess the business environments of the countries they are already operating in as well as the ones they are considering investing in. Risk Analysis is a formal framework that is used to evaluate the risks that organizations can face. A good risk analysis affords the organization the opportunity to decide what actions to take to minimize disruptions or decide whether the suggested strategies can be used to control risk and are cost-effective. Above risk is a perceived extent of possible loss, but risk can be view with various levels of impact, what may be a small risk for one person may destroy the livelihood of someone else.

Types of exposure

Transaction exposure
It is the extent to which ...

Solution Summary

This solution discusses mitigation of risks and exchange rates at an insurance company.