sumimasin Wrote: ------------------------------------------------------- > .5% drop in interest rate. asset will increase by > 2*0.005=0.001 i.e 1% > > where as liabiity will also increase by > 1*0.005=0.5% > > isnt that surplus will increase by 1% - 0.5% = > 0.5% > > anybody can confirm… feelin lost plan surplus will reduce by -0.5%
I agree on the surplus reduce by 0.5% as 50 basis point drop in interest leads to 1% increase in liabilities and 0.5% increase in asset, offsetting each other u get 0.5% decrease in surplus
panda8573 Wrote: ------------------------------------------------------- > I agree on the surplus reduce by 0.5% > > as 50 basis point drop in interest leads to 1% > increase in liabilities and 0.5% increase in > asset, offsetting each other u get 0.5% decrease > in surplus Do you remember the basic definition of duration?
Forget the fully funded debate-- the crux of this question originated based on BSAS 2011 AM exam, question 5 part C. METHOD #1: BSAS solution shows same solution matches people on this thread i.e. Change in Surplus = -1 * LADG * Surplus * Change in Yield METHOD #2: BUT, Since Assets and Liability Values and Durations are know, one could calculate effect on Assets and Liabilities individually and the answer should match, shouldn’t it? Try it using both methods using following info: Assets = $50m Asset Duration = 10 Liab. = $40 Liab Duration = 12 Match?
I may be wrong, the solution in Method1 is not likely what it’s asking for. LADG is not exactly the duration of equity(or surplus).
Wow y’all are really spoiling BSAS for me, I’m taking it tomorrow.
If it’s the solution from CFAI, I’ll take it. No second thought.
Thanks for the post.
Sorry bpdulog…BUT keep in mind you got no clarification, just more confusion added here 
We are on track to writing a paper for better Institutional Duration Mismatch management :-), but no progress on how or if CFAI views this…I am losing trust in BSAS given the high error rate in their Exam / Answers.
jbaphna Wrote: ------------------------------------------------------- > Forget the fully funded debate-- the crux of this > question originated based on BSAS 2011 AM exam, > question 5 part C. > > METHOD #1: > BSAS solution shows same solution matches people > on this thread i.e. > Change in Surplus = -1 * LADG * Surplus * Change > in Yield > > METHOD #2: > BUT, Since Assets and Liability Values and > Durations are know, one could calculate effect on > Assets and Liabilities individually and the answer > should match, shouldn’t it? > > > Try it using both methods using following info: > Assets = $50m > Asset Duration = 10 > Liab. = $40 > Liab Duration = 12 > > > Match? Hmm, footnote 32 on p419 of Vol2 CFAI text - the change in the mkt value of net worth is approx = LDAG * mkt Val Assets * change in Int rate
What is abbreviation ldag?
Leverage adjusted duration gap