• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Identifying the correct calculation for option premium questions

B

bryce

Member
Hello

I'm having diffculty identifying from the question which calculation method to use (not Conventional verus North Amercian but the actual calculations) to solve the additional option premium questions.

For example, in the revision booklet 4 Q9 (April 2005 Q3) and Q29 ii) (April 2010 Q6) are basically the same question with different figures used. However, Q9 uses the full calculation method where it finds the basic premium and option premium and total EPV benefits, and equating to get the additional premium, but Q29 ii) after deriving the proportino taking up the option, they only do a simple (EPV option benefit EPV Premiums) and discount back to find the additional premium.

I'm not able to see whats different in the question wording that directs you to use one method or the other. Some help please?
 
Hi bryce

Good question. :)

As a general principle, using the full calculation method will work, and would be the method I would always use if I was in any doubt at all.

Sometimes, it turns out that certain terms within the full calculation method cancel out, so what is left is just the EPV of the option benefits/premiums. This happens if the average mortality post-exercise is ultimate.

For this reason, you often see that conventional method answers will just include the option parts. It would though be equally correct to use the full calculation method, and this should give the same answer.

Q29(ii) is also one of these certain cases where terms cancel, and so the shortcut of using just the option parts works.

Hope this helps clarify.
Best wishes
Lynn
 
You must log in or register to reply here.
Back
Top