1. CIA Annual Meeting LOOKING BACK…focused on the future

2. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Moderator Jacques Boudreau Moderator Jacques Boudreau

3. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Current status Why is CLIFR concerned? Some historical data Big Mac index Analysis Proposal Current status Why is CLIFR concerned? Some historical data Big Mac index Analysis Proposal

4. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Standard 2340.16: The needed assumptions would include foreign exchange rates when policy liabilities and their supported assets are denominated in different currencies. Standard 2340.16: The needed assumptions would include foreign exchange rates when policy liabilities and their supported assets are denominated in different currencies.

5. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Standard 2340.17: The best estimate would be for continuance of the foreign exchange rates at the balance sheet date, except that the best estimate should anticipate any imminent unfavourable devaluation. There would be a provision for adverse deviation in respect of a currency mismatch. Standard 2340.17: The best estimate would be for continuance of the foreign exchange rates at the balance sheet date, except that the best estimate should anticipate any imminent unfavourable devaluation. There would be a provision for adverse deviation in respect of a currency mismatch.

6. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future 2004 Fall Letter Encourages the development of an integrated multi-currency interest model Best estimate: Consider projected exchange rates and interest rate differentials. PfAD: Consideration given currency valuation, productivity levels, supply shortage, terrorism, wars. 2004 Fall Letter Encourages the development of an integrated multi-currency interest model Best estimate: Consider projected exchange rates and interest rate differentials. PfAD: Consideration given currency valuation, productivity levels, supply shortage, terrorism, wars.

7. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future 'Too many inadequate reserves for naked positions'

8. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

9. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Canada – US exchange rate January 1975 to December 2004 Highest: $1.0322 June 1976 Lowest: $0.6244 February 2002 Depreciation of 39.5% in 308 months. Canada – US exchange rate January 1975 to December 2004 Highest: $1.0322 June 1976 Lowest: $0.6244 February 2002 Depreciation of 39.5% in 308 months.

10. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

11. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Canada – UK exchange rates January 1975 to December 2004 Highest: £ 0.6244 February 1985 Lowest: £ 0.3492 October 1980 Appreciation of 78.8% in 52 months. Canada – UK exchange rates January 1975 to December 2004 Highest: £ 0.6244 February 1985 Lowest: £ 0.3492 October 1980 Appreciation of 78.8% in 52 months.

12. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

13. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Canada – EURO exchange rates January 1989 to December 2004 Highest: € 0.8092 August 1989 Lowest: € 0.4923 March 1995 Depreciation of 39.2% in 67 months. Canada – EURO exchange rates January 1989 to December 2004 Highest: € 0.8092 August 1989 Lowest: € 0.4923 March 1995 Depreciation of 39.2% in 67 months.

14. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

15. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Canada – Jamaica exchange rates January 1991 to December 2004 Highest: $ 51.659 November 2004 Lowest: $ 6.985 January 1991 Appreciation of 639.6% in 166 months. Canada – Jamaica exchange rates January 1991 to December 2004 Highest: $ 51.659 November 2004 Lowest: $ 6.985 January 1991 Appreciation of 639.6% in 166 months.

16. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future The Economist’s BIG MAC Index Invented in 1986 Light-hearted guide to the “correctness” of currency levels Based on purchasing-power parities (PPP) The Economist’s BIG MAC Index Invented in 1986 Light-hearted guide to the “correctness” of currency levels Based on purchasing-power parities (PPP)

17. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Theory of PPP says that in the long run exchange rates should move towards rates that would equalize the prices of an identical basket of goods and services in any two countries.

18. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future How it works: Japanese Big Mac 262.00 yens American Big Mac 2.90 U.S. dollars PPP 90.34 Exchange 113.00 The Yen is 20% undervalued How it works: Japanese Big Mac 262.00 yens American Big Mac 2.90 U.S. dollars PPP 90.34 Exchange 113.00 The Yen is 20% undervalued

19. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future As of June 9 th, 2005 Undervalued currencies Vs. the U.S. dollar Percentage Canada -14 Australia -18 Argentina -46 Brazil -22 China -59 Russia -52 As of June 9 th, 2005 Undervalued currencies Vs. the U.S. dollar Percentage Canada -14 Australia -18 Argentina -46 Brazil -22 China -59 Russia -52

20. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future As of June 9 th, 2005 Overvalued currencies Vs. the U.S. dollar Percentage Kuwait 142 Iceland 118 Norway 98 Switzerland 65 Sweden 36 As of June 9 th, 2005 Overvalued currencies Vs. the U.S. dollar Percentage Kuwait 142 Iceland 118 Norway 98 Switzerland 65 Sweden 36

21. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

22. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

23. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

24. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

25. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

26. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

27. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

28. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

29. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

30. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

31. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

32. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

33. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future

34. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future Best Estimate Currency forwards If not available, determined based on interest rate differentials. Best Estimate Currency forwards If not available, determined based on interest rate differentials.

35. CIA Annual Meeting Session 5404: Measuring and Managing Currency Risks LOOKING BACK…focused on the future MfAD 5% to 50% drop in value Low margin: Short term, highly integrated economies High margin: Longer term, developing economies Test for worst time of drop, similar to what is done for equities. MfAD 5% to 50% drop in value Low margin: Short term, highly integrated economies High margin: Longer term, developing economies Test for worst time of drop, similar to what is done for equities.