In the correction of the last question of the last item there is this sentence:
The equity returns are not benchmarked for risk purposes because the interest rate derivatives are designed to hedge the plan’s economic liabilities.
What the fuck is this suppose to mean?
In other questions we saw that equities were part of the combination of assets that best mimic liabilities. So equities should be in the benchmark. So why now are they saying that equity returns are not benchmarked?
It fucking means that risk factors are matched using derivatives, and equity here is solely used for excess return.
So that means that we have an exposure to equity (or more precisely, to equities’ risk factor) with derivatives, and we add another layer of equities exposure to generate excess return?
No it means derivatives hedge liabilty risk of term structure, interest rate movement, contingency, and god knows what else, leaving the remaining funds to be invested in equity, for achieving excess return.
In the item set, real wage growth is a liability risk exposure, so you have to hedge this with equities exposure.
In the item set, real wage growth is a liability risk exposure, so you have to hedge this with equities exposure.
Then you hedge every other risk that isn’t captured by equity, and predominantly invest in equity, of which its weighted expected return should outperform the return requirement of the pension + cost of hedging. Then you make excess returns.
I see, thanks.