I’ve got a question on the three risks faced by those portfolios that are backing a fixed set of liabilities.
On one question in curriculum book, it says a fixed-income portfolio with non-callable bonds backing a future liability is subject to interest rate risk, cap risk, and contigent claim risk.
I do understand that it is subject to interest rate risk, but why is it also subject to two other risks?
Since it is not a portfolio with floating rate bonds and non-callable issues, the two other risks are not to be concerned, from my view.
Can anyone please explain why it is subject to all three risks?
I was confused by this question as well. The text states that contingent claims risk is only in relation to calls and the questions specifically states that its a non-callable bond portfolio so why is the portfolio subject to contingent claim risk?
question is asking in more generic terms - not related to the particular portfolio…
However, he is concerned about the various risks associated with the liabilities including interest rate risk, contingent claim risk, and cap risk.
and question asks
which is obviously true - so YES is the answer. It IS NOT related to the particular liability he is trying to look at. It is a “googly” question.