Currency Risk

Overview

This calculator implements the gross capital requirement for the Currency Risk sub-module within the Solvency II Market Risk standard formula.^[1] The Currency Risk requirement is defined as the economic capital necessary to cover the loss in basic own funds resulting from a 1-in-200 year stress event affecting exchange rates.^[2]

Input Terms

• Home Currency: The reporting currency of the undertaking, which is excluded from the exchange-rate shock.^[1]
• Asset Exposure: The Solvency II market value of assets denominated in the foreign currency, translated into the home currency.
• Liability Exposure: The Solvency II value of technical provisions or liabilities denominated in the foreign currency, translated into the home currency.
• Hedges / Derivatives: The value of currency swaps, forwards, or similar hedging positions used to mitigate the net-open exposure in each currency. The shock is assessed through its impact on basic own funds, so derivative positions should be reflected in the stressed loss measure rather than treated as a separate non-regulatory overlay.^[3]
• Article 84 Trace Normalized Currency Exposure: The upstream normalized FX-sensitive exposure carried over from the `Exposure Normalization and Look-Through` calculator for the same currency slice.

Technical Rationale

The Currency Risk sub-module is calibrated to a 99.5% confidence level over a one-year horizon. It captures the sensitivity of the undertaking's basic own funds to adverse movements in exchange-rate parities. The standard formula applies a prescribed 25% shock to the value of foreign-currency assets and liabilities relative to the home currency.^[1]

The calculation first nets exposures within each individual currency. Article 188 then requires the undertaking to calculate, for each foreign currency, the capital requirement for an increase of that currency against the local currency and for a decrease of that currency against the local currency, and to sum across foreign currencies the higher of those two requirements.^[1] This means the standard-formula result is built currency by currency rather than by selecting a single portfolio-wide scenario.

Important Notes

• Calculator placement: Currency Risk remains a calculator because it applies one Article 188 currency-risk formula to per-currency prepared exposure rows. A future workbench may coordinate source-system exposure mapping and hedge evidence, but that orchestration should not replace this atomistic calculator.
• Rulebook build: The Standard Formula sheet groups repeated foreign-currency rows by currency, applies `Assets - Liabilities - Hedges` to each net position, computes the loss under both directions of the standard 25% exchange-rate shock for that currency, and then sums the higher requirement per currency.^[1]
• Derived Net Position: The calculator now derives the net open FX position from asset, liability, and hedge legs before applying the 25% shock, rather than relying on a preassembled full-build position only.
• Home-Currency Exclusion: Any exposures denominated in the undertaking's home currency must be excluded from the 25% shock, as they do not contribute to FX-driven volatility in basic own funds.^[1]
• EIOPA clarification: EIOPA Q&A 1186 confirms that the currency shock is assessed by reference to the resulting loss in basic own funds, including the effect of derivatives where relevant.^[3]
• Change since the 2015 version: Commission Delegated Regulation (EU) 2026/269 does not replace the current Article 188 standard 25% currency-risk structure reflected here.^[4]
• Prepared-input note: If currency codes, asset exposures, liability exposures, or hedge positions are entered rather than derived from source systems and look-through mappings, treat the output as an educational reconstruction of the Article 188 method rather than a professional filing result.
• Scope boundary: Article 188(5) euro-pegged currency adjusted factors and Article 188(7) scenario coordination with Article 206 counterparty-default risk are not included in the current public runtime. Those need separate atomistic factor/scenario controls before this route can claim those treatments.
• Look-Through Approach: Per Article 84 of the Delegated Regulation, insurers must "look through" investment funds to the underlying currency denominations so the prepared net open FX position captures the real foreign-exchange exposure.^[5]
• Gross vs. Net SCR: This calculator determines the standalone Currency Risk SCR. Solvency II risk is only finalized as a net impact on Basic Own Funds after diversification in Market Risk, then within BSCR, and after the top-level LAC TP and LAC DT adjustments.
• Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.^[6]
• Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01.01 standard-formula reporting view.^[7]