Assignment X3 Question 7

Hi

The solution says , if a real world calibration were being used, the charges would be accumulated in each simulation in a similar way to the projection of the unit fund. The charges would then be set so that their accumulated value exceeded the guarantee cost in a large number of simulations, say 90%. Please explain in a simpler way.

Please advise how would the charges for all product variations be extrapolated from the model points?

 

Hi
Just a reminder.
Thanks

 

Hi
Just wondering if you sat the exam this time?
I've only just started monitoring this forum so was wondering why you might be posting after the Exam date.
Thanks!
Best wishes
Robert

 

Hi

Yes I sat the exam. I am still interested in understanding this.

Thanks

 

Ok, thanks, so not so urgent...Would another reader like to have a go at trying to explain the passage (first paragraph) more simply?
Here it is again for reference:
Assignment X3 Q7: "The solution says , if a real world calibration were being used, the charges would be accumulated in each simulation in a similar way to the projection of the unit fund. The charges would then be set so that their accumulated value exceeded the guarantee cost in a large number of simulations, say 90%. Please explain in a simpler way."
If no-one has had a try in 3 weeks, send another reminder, and I'll put something on.
Robert

 

Re your second point about extrapolating for other product variations. Suppose you have 2 model points - one for age 30 the other for age 40. Charge for age 30 is +2% on FMC. Charge for age 40 is +2.5% on FMC. So we'd extrapolate (well, interpolate here) that the charge for age 35 would be +2.25% on FMC. It would be as simple as that.
Robert

 

Thanks Robert. Please assist with the first part.

 

Instead of discounting the guarantee cost and comparing it with the discounted value of the charges, we accumulate the charges to the maturity date and compare it with the cost of the guarantee at that point. Then find the charging rates (ie prices) that result in these accumulated charges covering the guarantee cost in 90% of simulations.
Accumulating means roll up with interest (at a suitable non-unit interest rate) from the time the charge emerges up to the maturity date.

 

Thank you.

 

Hi Robert,

When the charge is set (i.e. via a reduced allocation), it is set so that it is sufficient to cover the simulated cost of the guarantee, so won't accumulating the charge with any non-unit interest rate (i.e. 0%, 2% etc.) will still make it sufficient? Please advise.

Thanks