Sept 2021

[rlsrachaellouisesmith]

Hi

In the solutions for Q1(i), one of the advantages stated is that investment risk can be reduced. Is this because if we use cashflow matching approach then the buy and hold strategy means that any changes in asset value does not impact our ability to meet liabilities as they fall due?

Q1(iii) why would a fall in inflation mean that derivatives would require collateral to be posted, is this just because with inflation swaps are paying fixed and receiving floating?

Thank you,
Rachael

 

[rlsrachaellouisesmith]

In Q4 (i) solutions it states the PE involves long periods of cash drawdown? I thought there was a short period for committed funds and then a longer investment period where committed funds can be drawn upon by the PE fund? Can you explain this please?
Thank you

 

[Colin McKee]

Q1 Investment risk is reduced in an LDI approach because the fund avoids things that have volatile investment values, such as equities and property, and sticks to investments that move with the liability values.
Falling inflation would cause swaps to require collateral, particularly those that the investor pays fixed and received actual RPI.
Q4 It depends on your definition of long. If an investor can have money drawn down for a year or two, many would say that it was a long period. As you say though, once the PE is up and running it is in place for a "long" period.