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Sept 2022 Ques 2 (ii)

M

Manisha

Member
Hi

Can someone please explain why BEL = Asset shares plus Cost of guarantees for WP business a reasonable approach? Thanks.
 
We are told in the question that this company is setting its WP BEL to be asset share + cost of guarantees only, so is not making any allowance for the cost of smoothing. Perhaps it is simply the case that there is limited smoothing cost overall; the company likely aims to smooth on a neutral basis over a reasonable period of time. Perhaps the company does not invest in particularly volatile assets. Perhaps it is currently at the 'centre' of the smoothing cycle so no smoothing cost. We obviously don't have enough information to know for sure, hence this doesn't feel like a route that would be worth going very far down in the exam (particularly given there are not many marks available).
 
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