A prominent Canadian LIC caters to mostly U.S.-based customers and underwrites insurance policies in U.S. dollars (USD). On the other hand, it maintains a portfolio of investments in Spain in euros (EUR). The current exchange rates are 1.25 CAD/USD and 0.625 EUR/CAD.

In two months' time, it expects to settle claims worth 12 million USD and collect investment returns worth 12.5 million EUR. The LIC expects both foreign currencies to depreciate by 5 (Canadian) cents in next two months. Other material parameters (interest rates, credit quality, liquidity issues, etc.) are not expected to change over the next two months.

1. What risk event(s) is the FI exposed to?

2, If exchange rates continue to prevail at current levels, what will be the net expected cash flow, in CAD, after two months?

3. However, if the two foreign currencies move as stated, what will be the net expected cash flow, in CAD, after two months?

4. Thus, what is the magnitude of the potential risk, in percentage terms, faced by the FI if both exchange rates change as stated? Is this an asset-side, liability-side or dual-side risk scenario?