Valuation Of Liabilities

Question 1

Define mark to market approach

Answer 1

to identify the assets that are best replicators of the future liability outgo, the price of these assets would be the market price of liabilities in the market

Question 2

How will the inflation rate, discount rate and related assumptions be derived in fair value approaches

Answer 2

Assets taken at market value
Liabilities discounted at yields on matching investments (bonds)
bond yield based on government bond or corporate bond
Better would be to use term-standard discount rates that vary over time
Market rate of inflation is difference between yields on suitable portfolios of fixed-interest and index-linked bonds

Question 3

How do we value a guarantee

Answer 3

Best using a stochastic approach as multiple simulations can be run
Parameter input the model should reflect the purpose. Same with level of prudence
Stochastic approach will typically be applied taking the fund as a whole. Do consider about members entering and exiting