Define marginal utility.

State the law of diminishing marginal utility.

(8 points) You are reviewing the ALM practices of YYZ Insurance. YYZ has blocks of term, participating whole life, immediate annuities, and deferred annuities. YYZ uses the following investment strategies: One asset portfolio is used to back all liabilities Assets with terms to maturity greater than 10 years are purchased Duration matching is the only ALM criteria considered . Asset and liability cashflows are projected on a statutory basis (a) (2 points) Critique these strategies and propose improvements if needed. YYZ's participating whole life product offers a policy loan feature that allows the policyholder to borrow against the policy's cash value at a rate specified in the contract. (b) (4 points) (i) Describe the embedded options of this feature from YYZ's perspective. (ii) Explain the ALM risks created. (iii) Propose risk mitigation strategies. YYZ is considering selling a Universal Life product that credits 50 basis points above LIBOR. YYZ will back the liability with the following assets: 10-year bond yielding 4% Interest rate swap that receives LIBOR and pays 3% fixed (c) (2 points) Recommend if YYZ should sell this product. Justify your response.(a) (2 points) For the following indexation methods: Multi-Year Point-to-Point (PTP) Annual Ratchet High Water Mark Describe the characteristics of each method. (ii) Compare the cost of each method. SLC Life is developing an Equity-Indexed Annuity (EIA) product with the following features: Single premium of 2,000 3-year maturity Annual ratchet with a 70% participation rate subject to a 10% cap and 0% floor Guaranteed minimum annual interest of 3% on the entire premium Surrender charge of 100 for early withdrawals You are given the following: A European call option with the same term and strike is valued at 45 . . The current risk-free rate is 4% annual effective compounding (b) (2 points) Calculate the value of the guaranteed minimum annual interest feature using the Put-Call Parity. Show all work. You are given the following index values: Year 0 Year 1 Year 2 Year 3 Index Level 12,500 11,000 12,750 13,300 (c) (3 points) Calculate the EIA surrender value at the end of each policy year. Show all work. (d) (2 points) SLC Life plans to use a traditional deterministic valuation for the EIA product. Critique this decision. (e) (2 points) Describe four assumptions required to value the above EIA product under a risk-neutral stochastic framework