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#1




Spring 16, #5c (notional principal)
I don’t understand the SOA’s answer (375 million) to this question. How can the interest rate risk be minimized if the answer ignores the size of the PBO (600 million)?
Let’s say interest rates decrease by 100 bps. Then: PBO increases by 600 x .14 = 84 F.I. Allocation increases by 500 x 40% x .05 = 10 Swap value increases by 375 x .16 = 60 That’s a net funded status change of 14. We could have achieved exactly 0 with a notional principal of 462.5 instead of 375. What am I missing? Thanks in advance. 
#2




It comes down to how the question is worded. This question ask to, "...minimize the interest rate risk on the funded status of the plan". This is achieved with by the solution:
Current Funded Status = 500/600 = 83.33% Your example funded status = (500+10+60)/(600+84) = 83.33% On fall 2017 Q 3(c), the question ask, to "...fully hedge the plan’s interest rate risk". This question requires hedging the total PBO.
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RPIRM, DMAC, FAC Last edited by Prob4Fun; 10212019 at 06:08 PM.. 
#3




I see. Thanks so much for the response. That’s a poorly worded question IMO.

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