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Hi all,
It appears to me that interest risk can be accounted for by either managing
the duration of the equity(such as Noris, Panning) or put up a risk
margin(such as Sholom/Hode).
If we ignore the differences between statutory/economical value of surplus
and future business(in other words, assume we are in the statutory account
framework as defined by Sholom/Hode), does panning's(or Noris's) method of
asset/liability management results in a 0 risk margin required in
Sholom/Hode's exhibits? If it does under which (allocated or non-allocated)
method?
For example, if the duration gap defined in Noris is 0 in Sholom/Hode's
example, what will the required margin for interest risk be under (1)
allocated method, (2) unallocated method? I think the answer is 0 for
unallocated method, since the total surplus will not be affected by change
in interest rate(theoretically, ignore the convexity and noninfinitestimal
interest rate change). This will probably produce a negative number under
allocated method because the reduction in the present value of liability
will be more than the reduction in present value of the asset that supports
the liability.
Anyone has some clear insights to the interest rate risk? Thanks.
---Yin
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Hi all,
It appears to me that =interest risk can be accounted for by either managing the duration of =the equity(such as Noris, Panning) or put up a risk margin(such as =Sholom/Hode).
If we ignore the differences =between statutory/economical value of surplus and future business(in =other words, assume we are in the statutory account framework as =defined by Sholom/Hode), does panning's(or Noris's) method of =asset/liability management results in a 0 risk margin required in =Sholom/Hode's exhibits? If it does under which (allocated or =non-allocated) method?
For example, if the duration =gap defined in Noris is 0 in Sholom/Hode's example, what will the =required margin for interest risk be under (1) allocated method, (2) =unallocated method? I think the answer is 0 for unallocated =method, since the total surplus will not be affected by change in =interest rate(theoretically, ignore the convexity and noninfinitestimal =interest rate change). This will probably produce a negative =number under allocated method because the reduction in the present =value of liability will be more than the reduction in present value of =the asset that supports the liability.
Anyone has some clear =insights to the interest rate risk? Thanks.
---Yin
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