Acted comments for part1 - most students confused costing the guarantee for pricing purposes with calculating a sterling reserve for the guarantee. What does this mean? Don't we calculate the cost x and use that to reduce the allocation rate to 100% - Y%.This allocation rate Y% then goes directly towards setting up the sterling reserve?
This question is about pricing rather than reserving. So the question is about how we set the charges at the outset of the contract, rather than how we subequently set the sterling reserve. So we are looking to estimate the distribution of the cost of the guarantee and can then set the charges so that we make a profit in a large number of simulations. Best wishes Mark
