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CP1-14: Choosing an appropriate investment strategy - page 9

Y

yuli2513

Very Active Member
Hi,

I have a small question on question (iii) on page 9.
The question asks to list the circumstances when an institutional investor would be very relaxed about volatile asset values, and the last bullet point given in answer is: perfectly matched assets and liabilities (eg unitised funds).

I'd like to know why unitised funds qualify in this case?

Thanks a lot and an early merry Christmas!
 
Last edited:
Consider a unit-linked life insurance policy where the benefit payable is the value of the unit fund held by the policyholder.

If the value of the assets underlying that unit fund increases, so does the benefit payable and hence the liability. Similarly if the value of the assets falls, so does the value of the benefit liability. Therefore this aspect is perfectly matched, so the life insurance company can be relatively relaxed about volatility in the asset values. [There will be secondary impacts, such as potentially higher withdrawals when asset values are volatile, but that goes beyond what this particular part of the course is considering.]

Hope that clears this up - and a merry Christmas to you too!
 
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