The question asks to calculate the Indexed pay out using High Water Mark Indexation. Further, It has an annual ratchet as well.
1According to the model solution the index based interest is based on S_max/S_initial.
a. where does the information about annual ratchet has been used in this calculation?
b. What would be the difference, if there was no annual ratchet at all?
2. In a later part of the question it asks about the impact of drop in net earned rate from pricing assumption.
The conclusion is that the dropped interest increase the GMAV cost and hence the premium portion left for option budget is reduced (which is said in the study note as well).
but, instead of saying that can't we conclude that the premium% left to cover Expenses and profit has been reduced and therefore conclude it as a drop in profitability??
Thanks in advance
1According to the model solution the index based interest is based on S_max/S_initial.
a. where does the information about annual ratchet has been used in this calculation?
b. What would be the difference, if there was no annual ratchet at all?
2. In a later part of the question it asks about the impact of drop in net earned rate from pricing assumption.
The conclusion is that the dropped interest increase the GMAV cost and hence the premium portion left for option budget is reduced (which is said in the study note as well).
but, instead of saying that can't we conclude that the premium% left to cover Expenses and profit has been reduced and therefore conclude it as a drop in profitability??
Thanks in advance
Fall 2011_Q8
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