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April 2013Q4(iii)

D

Dar_Shan0209

Ton up Member
Hi tutors,

Is the above question still relevant for the current syllabus? If yes, can you please advise how was the profit profile determined?

Thanks.
 
Hi Darshan

Yes, question subject matter is still relevant ... although you wouldn't be expected to draw graphs in the current 'online in Word' exam.

Re the profit profile, it's a bit like one of those 'position diagrams' that come up for call / put options or combinations of these.

The question mentions that SLAS pays a premium for the swap, hence why the payoff is a flat negative line (= size of the premium) if the mortality improvement (= reduction in mortality rate) < 10%.

Then, if the mortality improvement is greater than 10%, we start seeing the profit profile lift, as a positive payout is made on the swap at maturity.

Finally, the profit profile flat lines for mortality improvements > 20%, this limit being mentioned in the question.

Let me know if I've mis-interpreted the question.
 
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