Dollar safety margin just a special case of Economic Surplus, correct?
Economic Surplus = Mkt Val assets - PV Liabilities
Dollar Safety Margin is difficult to put in words so i will just tell you how to calculate it: (see 2013 mock Q8)
- Find the FV of the market value of the portfolio using the current discount rate (DR):
FV = MKTVAL(1+DR)^T
- Discount the FV by the portfolios immunized return (IR) over the same time period:
PV = FV / (1+IR)^T
- Dollar Safety Margin = MKTVAL - PV
It’s the special case of Economic surplus?
i guess you can think of it is an implicit economic surplus based on the difference between the immunized rate of return and the discount rate applied to the PV of liabilities.
It is not an explicit surplus in that if you were to liquidate your assets and pay the PV of your liabilities, you would not have money left over.
So it is a surplus that will be realized over time as a result of your immunized return being higher than your discount rate.