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Sorry this is so long in coming. I've worked on this last week, but am
finishing it up today.
I believe the MC question you're referring to is #1 from the 1994 exam. The
second statement says "As the equity required for pricing risk increases,
the risk adjustment should decrease." This is from p. 169 and 170 of the
text where the pricing risk multiplier to equity is compared to the risk
adjustment implied. I think the confusion lies in the way Butsic refers to
this Z=e(R-i) formula. Once Z has been determined, this relationship
applies, but the Z required varies based on the type of reserve. He says
for Pricing Risk, let the parameter k be the multiplier of the Reserve Risk.
As the k parameter gets larger, which he's using as the equity requirement
in this section, the risk adjustment goes down.
Hope this helps. And if I'm missed his point (a very likely possibility),
please correct me.
-----Original Message-----
From: mvezina@iore.com [SMTP:mvezina@iore.com]
Sent: Monday, March 08, 1999 7:50 AM
To: studygroup10@lists.casact.org
Subject: Butsic - interest
One of the past multiple choice question says:"if the required equity
increases, the risk adjustment decreases. Why is that since the adjustment
is z=e (r-i)?
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Sorry this is so long in coming. =I've worked on this last week, but am finishing it up today.
I believe the MC question you're =referring to is #1 from the 1994 exam. The second statement says ="As the equity required for pricing risk increases, the risk adjustment =should decrease." This is from p. 169 and 170 of the text where =the pricing risk multiplier to equity is compared to the risk =adjustment implied. I think the confusion lies in the way Butsic =refers to this Z=3De(R-i) formula. Once Z has been determined, =this relationship applies, but the Z required varies based on the type =of reserve. He says for Pricing Risk, let the parameter k be the =multiplier of the Reserve Risk. As the k parameter gets larger, =which he's using as the equity requirement in this section, the risk =adjustment goes down.
Hope this helps. And if I'm =missed his point (a very likely possibility), please correct me.
-----Original =Message-----
From: mvezina@iore.com =[SMTP:mvezina@iore.com]
Sent: Monday, March 08, 1999 7:50 AM
To: studygroup10@lists.casact.org
Subject: = Butsic - interest
One of the past =multiple choice question says:"if the required equity
increases, the risk =adjustment decreases. Why is that since the adjustment
is z=3De =(r-i)?