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Modelling foreign exchange rate transaction exposure of UK insurance companies

Modelling foreign exchange rate transaction exposure of UK insurance companies PurposeThe purpose of this paper is to study the sensitivity of foreign exchange exposure through the cash flow estimation method using a sample of 59 UK insurance companies. This approach allows a decomposition of exposures into short- and long-term components. By revealing the nature of their cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures.Design/methodology/approachMartin and Mauer’s (2003, 2005) three-stage model is used to estimate foreign exchange rate transaction exposures for the sample of 65 UK insurance companies over the period 2004-2013. However, this paper has one important innovation to this method. Instead of the model used in previous papers, the paper uses a model from the actuarial field that was proposed by Blum et al. (2001) for modelling foreign exchange rates with their relevant constituents (inflation and interest rate).FindingsThe evidence shows that the currency transaction exposure for non-life insurers is greater than that of life insurers. Moreover, the author finds that large insurers exhibit lower frequencies of foreign exchange transaction exposure than small insurers.Originality/valueThe value of this paper comes from the fact that revealing the nature of cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic and Administrative Sciences Emerald Publishing

Modelling foreign exchange rate transaction exposure of UK insurance companies

Amer, Islam
Journal of Economic and Administrative Sciences , Volume 32 (2): 17 – Nov 21, 2016
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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1026-4116
DOI
10.1108/JEAS-05-2015-0013
Publisher site
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Abstract

PurposeThe purpose of this paper is to study the sensitivity of foreign exchange exposure through the cash flow estimation method using a sample of 59 UK insurance companies. This approach allows a decomposition of exposures into short- and long-term components. By revealing the nature of their cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures.Design/methodology/approachMartin and Mauer’s (2003, 2005) three-stage model is used to estimate foreign exchange rate transaction exposures for the sample of 65 UK insurance companies over the period 2004-2013. However, this paper has one important innovation to this method. Instead of the model used in previous papers, the paper uses a model from the actuarial field that was proposed by Blum et al. (2001) for modelling foreign exchange rates with their relevant constituents (inflation and interest rate).FindingsThe evidence shows that the currency transaction exposure for non-life insurers is greater than that of life insurers. Moreover, the author finds that large insurers exhibit lower frequencies of foreign exchange transaction exposure than small insurers.Originality/valueThe value of this paper comes from the fact that revealing the nature of cash flow exposures, companies can evaluate the effectiveness of their hedging programmes and focus their hedging efforts according to the nature of their exposures.

Journal

Journal of Economic and Administrative Sciences – Emerald Publishing

Published: Nov 21, 2016

References

  • The foreign exchange exposure of UK non-financial firms: a comparison of market-based methodologies