This past exam is on p.375, CFAI vol.2 According to the solution for part (A), there are 3 problems with Hannibal: 1. “Interest rate risk” — This one I understand. 2. “A focus on short-duration products will accelerate the mismatch” — From where can we tell the company is focusing on short-term-duration products? 3. “The company has not generated sufficient reserves and surplus relative to liabilities, given the risks it faces; thus it is increasing its risk of insolvency” — Don’t know what it’s talking about. Any hint? - sticky
For #2 can’t help b/c I dont have teh book wiht me. For #3 if their Assets are $500M and their Liabilities are $1,000M then the Short fall of $500M must be made up with a cash contribution from the Company which could force them into insolvency b/c they might not have the cash to make the conttribution. If they take out a loan to do this then they are increasing their leverage which increases their risk of default…
hmmm … for #3, please refer to the scenario in the book. - sticky bigwilly Wrote: ------------------------------------------------------- > For #2 can’t help b/c I dont have teh book wiht > me. For #3 if their Assets are $500M and their > Liabilities are $1,000M then the Short fall of > $500M must be made up with a cash contribution > from the Company which could force them into > insolvency b/c they might not have the cash to > make the conttribution. If they take out a loan > to do this then they are increasing their leverage > which increases their risk of default…
- “A focus on short-duration products will accelerate the mismatch” — From where can we tell the company is focusing on short-term-duration products? Well they issue GICs, which has duration of 2 years. Given their Assets duration of 6 and Liabilities of 4, it will only accelerate mismatch -> weight of GICs in liabilities increases so duration will decreases 3. “The company has not generated sufficient reserves and surplus relative to liabilities, given the risks it faces; thus it is increasing its risk of insolvency” — Don’t know what it’s talking about. Company faces significan duration gap, relative to its shorfall, and it keeps continuing to widening its gap without increasing the surplus -> risk of loss cannot be cushioned with surplus thus it is increasing the risk of insolvency