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Old 01-03-2002, 02:15 PM
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Our company has a significant amount of EIA business. For cash flow testing, we normally run the equity indexed block through 100 random scenarios. Have any of you ever incorporated equity rates with the New York 7 interest scenarios for CFT? We have a "sister company" that could use the EIA results to offset a deficient block. However, we have not ran the EIA's against the New York 7 because we were unsure of the equity assumptions (what's appropriate). Any thoughts? Thanks in advance!
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Old 01-11-2002, 12:55 PM
OldtimeFSA OldtimeFSA is offline
 
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Perhaps I'm misinterpreting the term "sister". However, each company must pass the SVL/Reg 126 testing on its own. You can combine products, to some extent, within a company. However, you can not combine products between two different companies (even if they are "related").
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Old 01-11-2002, 01:49 PM
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How do you incorporate the fluctuations in option costs into scenarios? It seems the probability of futures costs rising is very high, considering stock market volatility.
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Old 01-11-2002, 02:02 PM
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Yes, the "sister company" is a separate company and is reported as a separate company (we're under the same "insurance group"). I can see where you misunderstood what I wrote ... we run cash flow testing for this company and they ALSO have EIA's.

My question is about how you handle EIA's and the NY7 scenarios (we run the blocks through 100 random scenarios but these results are not included with the NY7 results).
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Old 01-11-2002, 02:31 PM
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Quote:
On 2002-01-11 12:49, JMO Fan wrote:
How do you incorporate the fluctuations in option costs into scenarios? It seems the probability of futures costs rising is very high, considering stock market volatility.
We have a formula that interpolates between the cost of an option "at the money" and "5% out of the money". This formula utilizes the scenario rates (as interest rates change, the cost of the options also change ... but the cost of the option is based onto the policyholder through an index margin).
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Old 01-11-2002, 02:45 PM
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It depends on your product design and the quality of your hedge. All characteristics of both should be modeled. If annual options are purchased for an annual reset product, and participation rates (or caps or spreads) can be adjusted annually without bounds, then stock market moves really won't change the profitability of the product, although interest rate changes (think inverted yield curve) and increased volatility might eat into your annual option budget or your ability in practice to manage profits.

But if you have a 7-year point-to-point and are dynamically hedging with futures, a whole bunch of stock market scenarios should be modeled, either deterministically or stochastically.

One deterministic way to model might be 7 stock market scenarios crossed with the NY7 interest rate scenarios. That would give you a feel for what scenarios need further attention.
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