Hi David,
I believe this question is the original source of Question 48 in the FRM full exam sample question. It i from Jorion Chapter 17 end of the chapter questions
This is the question:
A pension fund has $100 billon in asset and $90 billon in liabilities .Assets are fully invested in stocks, and liabilities have a modified duration of 15 years. In 2002, stock fall by 22.1% and yield drop by 1.24%, compute the surplus at the end of 2002 and the return (scaling by initial asset value)
My question is that: In the sample exam question, the yield increased in which case the value of the liabilities was decreased by (1.2%*12.5 modified duration) which resulted in SaR of EUR 12.75 million
But in the question above, the yield drop (which implies that value of liabilities increase because Jorion said in page 433 that “when liabilities consist of mainly of nominal payments, their value in general will behave like a short position in a long term bond.”
Given this, the pension fund will be underfunded by $ $28.840 billon or a negative Surplus of $28.840 billion in 2002.
But I am not sure that is correct. Please I need your help in this one.
Thanks,
Concepts
I believe this question is the original source of Question 48 in the FRM full exam sample question. It i from Jorion Chapter 17 end of the chapter questions
This is the question:
A pension fund has $100 billon in asset and $90 billon in liabilities .Assets are fully invested in stocks, and liabilities have a modified duration of 15 years. In 2002, stock fall by 22.1% and yield drop by 1.24%, compute the surplus at the end of 2002 and the return (scaling by initial asset value)
My question is that: In the sample exam question, the yield increased in which case the value of the liabilities was decreased by (1.2%*12.5 modified duration) which resulted in SaR of EUR 12.75 million
But in the question above, the yield drop (which implies that value of liabilities increase because Jorion said in page 433 that “when liabilities consist of mainly of nominal payments, their value in general will behave like a short position in a long term bond.”
Given this, the pension fund will be underfunded by $ $28.840 billon or a negative Surplus of $28.840 billion in 2002.
But I am not sure that is correct. Please I need your help in this one.
Thanks,
Concepts
