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CP1 Notes - Chapter 12

D

Darragh Kelly

Ton up Member
Hi,

Just a couple of questions from notes in relation to chapter.

1. Section 9
Is stability the same thing as consistency with regard to valuation of assets? I know consistency is cover in section 8.2 so not sure... I kinda get why it's not good practice to value a volatile assets with liabilities using a 'stable' (constant?) interest rate. But what exactly does stability mean here?

2. Section 8.1
Just struggling to think of a situation where discontinuance would occur, apart from say memebers of a pension fund contributing a percentage of their salary to the fund. Then the company providing the pension fund decides to scrap the fund. So the fund is discontinued? So they need to pay the members back their contributions and so would need to have sufficiently liquid assets to do so? Can't really think of any other situation where discontinuance valuation would be used?

3. Section 6
Just wondering what exactly 'market-consistent valuation of liabilities' means? Is it simply methods that are consistent with what the market generally does?

Thanks very much,

Darragh
 
Hi Darragh

Regarding your first query, these terms mean different things in this context. Consistency, here, is about being consistent between the valuation of assets and liabilities. If a valuation is stable, it produces market values that vary less over time.

Regarding your second query about discontinuance, this is covered in Chapter 34 and so should become clearer later in your studies.

A market-consistent valuation is intended to reproduce the value that the asset / liability would be traded at in a deep and liquid market; this is covered further for liabilities in Chapter 31.

I hope this helps.
 
Hi James,

Apologises on delay in response.

So with regarding consistency for example, is that like if we decide to use 5% for discounting assets and liabilites we are being consistent with our valuations?
Then if a valuation is stable it means that there is less variance in the market prices over time. So an example of this would be deciding on whether or not to use a volatility rate of 20% or 5% to value assets/liabs over 20 year peroid. Of course 5% would result in more stable market values?

Thanks on the other bits, I'll get to them in later chapters.

Thanks for your help,

Darragh
 
Hi Darragh

On the consistency point: yes, that's what we mean by consistency between our valuation of assets and liabilities.

Regarding the volatility of a valuation method, a valuation method that means the value of assets and/or liabilities will vary a lot over time - from valuation to valuation - is said to be volatile. For example, a market valuation of equities will be a more volatile valuation method than taking a smoothed market value (as the latter won't vary as much).

Hope this helps.
 
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