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April 2020 Q4(i)

A

AKS01

Very Active Member
Hi,

In this question, the examiners report says that profitability is the same for both contracts on day 1 only... why is this?
It just states that profitability is the same for both products in the question so I'm confused as to how that would suggest that profitability would change over time?

Thanks,
 
AKS01 said:
Hi,

In this question, the examiners report says that profitability is the same for both contracts on day 1 only... why is this?
It just states that profitability is the same for both products in the question so I'm confused as to how that would suggest that profitability would change over time?

Thanks,
Click to expand...
Hi

The contracts have been priced to have the same expected profitability. However, their actual profitability will depend on the experience. Actual experience may turn out to be different to that expected and so the eventual profitability will differ.

Best wishes

Mark
 
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