The situation
- Our client issues travellers' cheques which we know will be
redeemed at some point in future, but the client wanted to have a
better understanding of when cheques will be used to better manage
its cashflows and liquidity. It also wanted estimates of how many
cheques would never be used, as these are another source of
profit.
What we did
- We realised that estimating how likely it is to cash a
travellers' cheque is similar to more traditional actuarial
calculations of estimating mortality rates.
- We approached the problem by estimating the mortality rates for
these cheques. Similarly to real lives, these rates vary with how
long the cheque has been "alive" or issued. There are also seasonal
trends: cheques are more likely to be used in the summer months
than the winter ones.
- Using our modelling techniques we were able to give a
distribution for what the redemptions each month could be as well
as estimating the value of travellers' cheques that will never be
used.
Client benefit
- The client was left with a better understanding of the range of
possible cash flows in the future, so it could invest its assets in
such a way as to be confident of being able to meet its
obligations.
