Reading 15 EOC 3 and 4

I don’t understand why in the question #3 the Retirees amount of 10 M$ is used while in the question #4, the Deferreds and the Active Accrued amounts are used ?

Thanks for the prompt answer.

I assume you are referring to question 2 and 3 ?

Question 2 is focused on mimicking using real rate bonds:

Note the text reads that company pays COLA adjustment to retirees based on CPI inflation and company will limit this benefit to only those retired from next year. So you need to hedge the full retirees portfolio of $10mm + half of future wage inflation (6 x 0.5) = 3.

Question 3 was more challanging for me:

Now you can see from above that payments to retirees are completely hedged and half of future wage inflation.

You are left with active accrued 9, deferred 5, half of future wage inflation 3 and half of real wage growth 1 = 18. The remaining half of real wage growth should be hedged through equities.

sorry for stirring up an old thread, but in this question 2 on real-rate bonds, why is “Deferred” not considered? Aren’t the deferreds also consdered to have already retired? So they should get a COLA too, and hence be included in the real-rate bond investment?

Thanks for your time…

They’re not retired, just left the company

sheeeeeyit…the things i miss out! thanks for pointing that out bro…appreciate your help