Let us consider a flat initial interest rate curve at 3%. An insurance company has sold the following 2 products to its clients: a 2% guaranteed (compound) rate product at maturity 4 years. Initial premium: 150 a 1% guaranteed (compound) rate product at maturity 2 years. Initial premium: 100 Let us consider that the company can invest in the different following bonds: Bond A Bond B Bond C 1 3 6 Maturity Coupon Nominal 0 2 0 100 100 100 Initial own funds in accounting view of the company are assumed to be null. 1. Compute the initial economical balance sheet 2. Propose an investment strategy based only on investments in bonds A & C such that the economical own funds of the company are protected against parallel interest rate shifts 3. Considering that strategy suggested at point 2 has been implemented, in case of parallel interest rate shift upwards, do you expect that the value of economical own funds will increase or decrease and why? 4. Compute the economical own funds change assuming that the interest rate curve instantaneously changes to Compound Maturity rate 1 3,20% 2 3,10% 3 3,15% 4 3,25% 5 3,40% 6 3,40% 7 3,50% 8 3,60% 9 3,60% 10 3,70% Has the strategy developed at point 2 enabled to protect the economical own funds and why? 5. Let us assume there would be a third product liability product, i.e. a 1,5% guaranteed (compound) rate product at maturity 3 years with 50 of initial premium, fully invested in bond B while the premiums relative to the two first liability products are invested according to strategy developed at point 2. In case of small parallel interest rate shift upwards, do you expect that the value of economical own funds will increase or decrease and why? Let us consider a flat initial interest rate curve at 3%. An insurance company has sold the following 2 products to its clients: a 2% guaranteed (compound) rate product at maturity 4 years. Initial premium: 150 a 1% guaranteed (compound) rate product at maturity 2 years. Initial premium: 100 Let us consider that the company can invest in the different following bonds: Bond A Bond B Bond C 1 3 6 Maturity Coupon Nominal 0 2 0 100 100 100 Initial own funds in accounting view of the company are assumed to be null. 1. Compute the initial economical balance sheet 2. Propose an investment strategy based only on investments in bonds A & C such that the economical own funds of the company are protected against parallel interest rate shifts 3. Considering that strategy suggested at point 2 has been implemented, in case of parallel interest rate shift upwards, do you expect that the value of economical own funds will increase or decrease and why? 4. Compute the economical own funds change assuming that the interest rate curve instantaneously changes to Compound Maturity rate 1 3,20% 2 3,10% 3 3,15% 4 3,25% 5 3,40% 6 3,40% 7 3,50% 8 3,60% 9 3,60% 10 3,70% Has the strategy developed at point 2 enabled to protect the economical own funds and why? 5. Let us assume there would be a third product liability product, i.e. a 1,5% guaranteed (compound) rate product at maturity 3 years with 50 of initial premium, fully invested in bond B while the premiums relative to the two first liability products are invested according to strategy developed at point 2. In case of small parallel interest rate shift upwards, do you expect that the value of economical own funds will increase or decrease and why