CFAI volume 2; page 308. A mismatch between the duration of assets and liabilities can create a net loss if asset duration exceeds that of liablities… Isnt this supposed to be the other way round? I dont get this…
it’s not supposed to be the other way around just think of it at extreme. you have your money invested at a duration of 5 years. all of the sudden because of increased rates, policy holders want to borrow from their policy at a low rate (or even cancel the policy) and reinvest it at the higher rate. if you don’t expect that, you are shit out of luck because of that the tendency is for the duration to decrease
Think of duraction simply as a risk factor. If assets and liabilities have differing level of exposure to this factor, then when the factor changes (i.e. interest rates go up) your assets will respond differently than your liabilities, which causes mismatch (and trouble)
Seeing it as a risk factor makes more sense… Thanks guys… what will i do with u guys ? 