The guidelines on Basis risks (EIOPA-BoS-14/172 EN) indicates at paragraph 1.14. that “Undertakings should consider basis risk arising from a currency mismatch to be material where the exposure covered by the insurance risk-mitigation technique is denominated in a different currency than the risk exposure of the undertaking, unless the currencies involved are pegged within a sufficiently narrow corridor or the fixed exchange rate is provided in the reinsurance contract.”. No quantitative threshold is given within the guidelines concerning the aforementioned corridor.

Nevertheless, the narrowness has to be verified through the criteria indicated in guideline 1 (paragraph 1.19) and guideline 2 (paragraphs 1.10 to 1.12) that the risk mitigation technique has to fulfil in order to be considered as not bearing any material basis risk.

In particular, one can state paragraph 1.9(b) that indicates that : “the changes in value of the exposure covered by the risk-mitigation technique closely mirror the changes in value of the risk exposure of the undertaking under a comprehensive set of risk scenarios, including scenarios that are consistent with the confidence level set out in Article 101(3) of Solvency II.”. Therefore, among other tests, the currency-risk module scenario has to be applied to both the exposure and the hedging mechanism and the two elements’ values should not significantly diverge.