Butsic Question

[Becoming An Actuary]

What was this question again? It's been mentioned in another thread...

[KindGrind]

Risk factor = 10%
Riskfree = 6%

assets : 1000
liabilities: 1196

What is the EPD?

Something like that

[A-Head]

Anyone get this? I made a few things up hoping for partial credit.

[Becoming An Actuary]

oh ya...i think....it's a put on the asset:liab ratio with strike 1.

all i did was plug and chug using S=1000/1196, K=1, ...

[KindGrind]

wow good idea

never thought of it that way

[cas_student]

I thought EPD was a call option on the liabilities with assets as the strike. Not sure though.

[Warren Schmidt]

I had no idea what they meant by "risk factor". I definitely don't remember coming across that term over the course of my studying. I made a guess and assumed that liabilities would either go up by 10% or down by 10%, at the end of the year - kind of along the lines of a binomial tree.

[KindGrind]

haha, warren, I assumed the EXACT same thing.

I think it could be either a put or a call, depending on whether assets are risky and liabilities are not, or assets are riskfree and liabilities are risky.

[Becoming An Actuary]

Originally Posted by KindGrind

I think it could be either a put or a call, depending on whether assets are risky and liabilities are not, or assets are riskfree and liabilities are risky.

Yes, that's true. I hate saying this prematurely, but this might be a multiple-answer / defective question.

[KindGrind]

Well anyway, as of now, I don't think anyone clearly know if that risk factor was indeed the volatility to be used in the calculation of the price of the option.

This question was kinda out of no where!