1. Won’t rising rates make it easier to fund the pension plan? As for the impact on the shareholders fund (i.e. shareholders equity), I am not too sure. I selected that it decreases. My logic was that when rates rise, fixed income asset prices drop but the pension plan's liability remains constant...hence a net negative impact to shareholders equity. This question was referring to a defined benefit plan. Somebody please let me know if my understanding of this is correct.
Read here more for information on this: https://www.brookings.edu/research/...erest-rate-for-defined-benefit-pension-plans/
3. I also chose variation margin of 54000. Only sensible answer in my opinion.
4. Wasn’t it asking for the price of the warrant given the price of a call? Answer is N/(N+M) * Price of call
5. I don’t remember this. Par rate? Or you mean discount rate (the question in a table format where you were asked to find the spot rate of the bottom row)? There was also a question where you given semi annual compounding rate and asked to find the monthly compound rate.
6. I applied standard formula and got an answer.
7. I can’t recall my answer now, but won’t rising futures prices hurt a stack and roll strategy?
8. How was this question framed again? Can’t recall it!
1. Why would liabilities remain constant? Wouldn't they fall, PV fall and new asset investment to fulfill future liabilities will also fall. What I mean is higher interest rates should help pension funds to fulfill their obligations easily.
I thought of it like this, pension funds defined benefit ones are in a way short on future rates, they receive defined / calculated amount and pay up at maturity in futures..if interest rates go up they effectively pay up less. Thus I guess increasing their shareholders wealth?