Hello there, I am struggling to understand the question itself and some parts of the examiner's report solutions for this question: The question: 1. The question states that the liabilities are sensitive to interest rates; is this just because the interest rates determine the discount rate for the liabilities; or does it imply that the company may have liabilities where values depend directly on floating interest rates' values? 2. In an interest rate swap, would the company receive floating interest rate payments and pay fixed rates? The solutions: 1. There is a sentence that says 'Consider interaction between interest rates and discount rates'. - What is this trying to say? 2. 'The relative position for the company will need to be the value that is put on the balance sheet'. - Does this mean that the number put on the balance sheet depends on the value of the swap at the time of valuation (i.e. negative if the swap's value is negative at a point and vice versa)? Would this be reflected in the asset side of the balance sheet (negative asset value if the swap has a negative value at that point)? 3. 'If anticipated future interest rates become lower than expected at the inception of the swap, the value of the asset held by the insurer will decrease, but this will offset the increase in their other assets assuming the durations match) making the impact less volatile on the liabilities side.' - Does 'the value of the asset held by the insurer will decrease' refer to the value of the swap itself? Would it decrease because the insurer would be paying more (fixed interest rate), but receiving less (floating interest rate)? - 'this will offset the increase in their other assets' - what assets is this referring to, and why would they increase? Possibly due to discounting at a lower rate? - 'making the impact less volatile on the liabilities side' - why is this so? Thank you in advance!
Hi there, Rather than waiting until someone is available to provide you with a response to your questions, it might be worth you having a look at the thread below, which I think will answer at least a few of them. If it's not helpful, or if you do still have any questions once reading it, please post them below . https://www.acted.co.uk/forums/index.php?threads/swaps-apr2018-p1-q4-ii.16598/ Thanks, Richie
Hi Richie, Thank you for the thread, it was definitely helpful! Just some things that I am still unclear about: 1. 'The relative position for the company will need to be the value that is put on the balance sheet'. - Does this mean that if the value of the swap is positive to the insurer at a point in time, this value would be reflected on the asset side of the balance sheet; and if negative it will be on the liability side? 2. 'If anticipated future interest rates become lower than expected at the inception of the swap, the value of the asset held by the insurer will decrease, but this will offset the increase in their other assets assuming the durations match) making the impact less volatile on the liabilities side.' - 'this will offset the increase in their other assets' - Is this referring to the increase in value of assets due to discounting at a lower rate? - 'making the impact less volatile on the liabilities side' - why is this so?
