Assignment X5

[rlsrachaellouisesmith]

Hi,

1) Assignment X5 - Q1 (ii) for each method the solution explains the reason for the higher return and the risk associated and generally merits/costs with each approach, is this standard expected response when asked about methods a manager could use to achieve higher returns? Or is there something in the question that indicates I should be doing this?

2) Assignment X5 - Q6(i) the marking schedule suggests that we should be considering factors when deciding whether or not to set up the fund, but the question says when setting up the trust, how can we determine if we are being asked about whether to set it up or not or the actual process of setting up?

3) Assignment X5 - Q6(ii) if we are asked for the relative merits of A compared with B I would have thought we were only answering positives of A, with a comparison to B. I must be wrong though because the solutions include negatives of A - why is this? Is it just because B has merits compared to A?

4) Assignment X5 - Q9 - solutions say that highly liquid assets will exacerbate the issue for two reasons - low income yield exacerbating cashflow problem, low return exacerbating funding risk. How are these two things different?

Thank you,

Rachael

 

[Colin McKee]

X5.1(ii) has the instruction word "discuss" which often involves more detail than an outline or list question. So this would be reasonably standard. X5.6(i) involves setting up the fund - this will involve all aspects that are involved in setting it up prior to launch, including design, and also practicalities in the process such as the trust deed and setting a management charge to cover costs. "Relative merits" almost always involves a two way discussion, and it is dangerous to assume the examiner only wants one set of merits, even if the wording suggests that one route is better than the other.
X5.9: I certainly agree that the return on most money market high liquid assets will be mainly income yield (ie no capital gains), so the return and the cashflow yield would be largely the same. I think the two bullets are just saying that anything with a low return and low income yield will cause two issues - one being that the fund doesnt earn the cashflow on a month to month basis to pay the benefits, and so need to sell assets, and secondly that over the long term, the assets will earn a low return which will make financing the value of the benefits increasingly difficult.

 

[rlsrachaellouisesmith]

Thank you for your response, particularly on 5.9 that makes things clearer.

 

[rlsrachaellouisesmith]

Hi,
I am looking at Q8(ii). It asks how a bank and pension fund might use ALM. I am considering how an investment fund might use ALM. I was thinking the biggest risk to an investment fund is market risk (similar to a bank) and liquidity (to meet redemptions). So could we say that an investment fund might use ALM in a similar way to a bank as liabilities are short term similar to a bank?
Thank you

 

[rlsrachaellouisesmith]

Hi
Related to X5.10 - when completing LDI with bonds in the notes it states there is mark to market risk. This is clearly an issue for insurers/pension schemes that have to prove solvency, but is it an issue for all companies because any losses due to valuation of investments must be reported on their P&L and therefore can lead to volatility in earnings and as such shareholder dividends?
Thank you