Hii all In the below attached qus., part(iii) tells that there will be a loss to the company if there is a small increase in interest rate since the DMT of assets is greater than the DMT of liabilities. What I'm getting from this qus. is the following four cases: If DMTA > DMTL → small increase in i→Loss If DMTA > DMTL → small decrease in i →Profit If DMTA < DMTL → small increase in i → Profit If DMTA < DMTL → small decrease in i→ Loss Please rectify if I'm wrong. Many Thanks.
Duration is a measure of rate of change of assets or liabilities. So if the duration of assets is more than the liabilities, then there will be more impact on assets. i.e., if interest rate rises, PV of assets will have more impact ( it will fall more) than the PV of liabilities.
Yes, I got what is written here in the solution. But, all the other cases which are listed above are also correct? Can we comment on whether the co. will make a profit or loss on the basis on DMTonly?
You need to think in terms of the surplus: PVsurplus = PVA - PVL Larger duration means it will be more affected by interest rates. So if interest rates fall PVA will rise more than PVL and we'll get a surplus. If interest rates rise PVA will fall more than PVL and we'll get a deficit.
Hi, On Reddington's Immunization, If you calculated the values and got the results below and were told to recommend solutions to the client when: Duration of Liabilities > Duration of Assets Duration of Assets > Duration of Liabilities Convexity of Liabilities > Convexity of Assets What would you recommend?
Hi John, Thanks for your response, I agree with you. But how exactly will we restructure the portfolio? This is where I am stuck.
