hi in chapter 22 page 9, it suggest that when interest rate rise suddenly, then both matched asset share and realistic prospective value will drop. I have 2 questions. Question1 what is a "matched" asset share (I know what is a asset share)? Question 2 why when interest rate fall, then both matched asset share and realistic prospective value will drop?
Answer 2 I think you might have not read the part in ch 22 pg 9 correctly. It says if interest rates rise the AS and realistic pros val will drop. For fall in AS see http://www.acted.co.uk/forums/showthread.php?t=3171 As for fall in pros val, consider this simple example: if you have a future liab to pay someone £100 after one year, what is its present value? The PV at 100% is £50. The PV at 300% is £25. So, as interest rates rise the value of your future liab falls. Reserves are the present value of your future liabs (accounting for future prems, expenses and probability of survival). So, as interest rates rise the value of your reserve falls. Hope it helps
