TWO QUICK QUESTIONS (unrelated to each other I know)! 1) Is Spot Return = S1-S0 or Futures Price 1 - Futures Price 0? 2) Why are life insurance companies exposed to interest rate risk? i.e. Can you please explain how their business operations or their liabilities are exposed to interest rate risk, as opposed to non-life which are not exposed to interest rate risk?
- Because of fixed rate and variable rate policies offered by them.
- also because some life/annuity policies allow cash withdrawal. People withdraw cash when interest rates are high, and bond values are low, so insurance companies can be forced to sell bonds at a loss to fund cash withdrawals if they don’t manage duration properly.
- non life insurance are not as exposed to int rates as life insurance because they don t have periodic payments, Iguess, plz correct me if i m wrong thanks
- I think you’re talking about the formula for return of an unhedged foreign asset R = Ra + Rs + Ra*Rs in this case, its the percent change in spot: (S1-S0) / S0
malek_bg Wrote: ------------------------------------------------------- > 2) non life insurance are not as exposed to int > rates as life insurance because they don t have > periodic payments, Iguess, plz correct me if i m > wrong > > thanks Explain this. It sounds wrong, but maybe I’m reading it wrong.
dlpicket Wrote: ------------------------------------------------------- > 2) also because some life/annuity policies allow > cash withdrawal. People withdraw cash when > interest rates are high, and bond values are low, > so insurance companies can be forced to sell bonds > at a loss to fund cash withdrawals if they don’t > manage duration properly. Ah thanks, that’s right - DISINTERMEDIATION. Valuation Risk. Reinvestment Risk. Cheers!
With regards to Life Insurance Company, the liabilities are calculated based upon a discount rate therefore affected by interest rates. Life insurance companies have long dated liabilities (duration is longer) than p& c companies, therefore mor exposed to interest rate risk. i believe the information pupdawg has offered is regards to annuities.
- S1-S0 2) As pupdawg & dlpicket have said. Non-life does offer such products.
dlpicket Wrote: ------------------------------------------------------- > 1) I think you’re talking about the formula for > return of an unhedged foreign asset > > R = Ra + Rs + Ra*Rs > > in this case, its the percent change in spot: > > (S1-S0) / S0 NOPE. SORRY CLARIFICATION HERE. I’m referring to Commodity Returns. Q: Is Spot Return = S1-S0 or Futures Price 1 - Futures Price 0?
James@Houston Wrote: ------------------------------------------------------- > 1) S1-S0 > Sorry, it should be (S1-S0)/S0. dlpicket is correct and we are referring to commodity R.
Spot Return is the change in spot prices (amounts), so I think it shall be S1-S0.
roll yied = chenge in future - change in spot? right? thanks! M.
yes malek