Consider Q1(ii) (b) Sept 2007 paper, involving the purchase of the IR derivative. the answer says this has no impact on CoG. Does this depend on these derivative being part of the working capital/estate, and not backing the actual asset shares themselves? if it is backing the asset shares, the differing volatility of the derivative to the asset it replaced would surely have an impact on the CoG?
the actual COG is unchanged therefore liability unchanged but as the derivative is an asset, value of asset will increase. there is an slight increase in credit risk due to 3rd party agreement with derivative provider
Yes, I agree. If the estate holds the derivative then the assets backing the asset share are unchanged, so the Future Policy Related Liabilities are unchanged. However, if the derivatives are used to back the asset share (more complex and so perhaps unlikely) then the likelihood of guarantees biting is reduced an the Future Policy Related Liabilities go down. Best wishes Mark
