We need to calculate the reserve for a value of r such that 1. p( k30 < r+1) is greater than or equal to 0.01,and 2. p(k30 <r) < 0.01. How do you come up with the first inequality?
Nothing about this stuff is simple to someone like me so I probably can't comment but if you look at the solution carefully perhaps you can examine whether your logic fits.
Apologies, I had to remove my previous comment because it was flawed. I am revisiting this question and the first line of the solution read "The reserve V should be such that the probability of making a positive future loss should be less than 1%"... How is it that the question requires a reserve calculation that will meet the future loss with a 99% probability. This sound very different from the probability of making a loss. Secondly, the original question remains unanswered for me as well, which is how do you get the two conditions P(K30<r)<0.01 and P(K30<r+1)>=0.01. Comments appreciated. Thanks in advance.
