Hello tutors.

Please assist me with the following question.

(7 points) You are evaluating a new hedging program for your individual variable annuity block of business. There are two approaches: I. Daily hedge rebalancing to minimize exposure to portfolio losses. II. Selective rebalancing, to reduce costs, triggered when interest rates have moved more than 50bps from the last rebalancing. You demonstrate how the proposed programs would have performed over the past 1,000 trading days by performing a backtest. Hedge gain/loss results net of fees for the backtests are shown below. Daily Rebalancing 20 0 Profit/Loss -Upper Limit -10 -Hedge Results -Lower Limit -30 250 500 750 1000 ObservationsSelective Rebalancing 20 10 Profit/Loss Upper Limit -10 -Hedge Results -Lower Limit -20 DE- 250 500 750 1000 Observations (a) (2 points) Evaluate the backtesting results of each of the two hedge approaches independently and in comparison to each other.7. Continued You have extracted the following data from your backtesting. Daily rebalancing Selective rebalancing Observations 1,000 1,000 Exceedances 17 7 X exceedances per 6 7 8 16 17 18 1,000 observations F(X) 0.65% 0.85% 1.25% 96.3% 97.5% 98.0% You are considering the following test methods: A. Binomial B. Rosenblatt C. Berkowitz (b) (3 points) (1) Recommend one of the above test methods (A-C) to perform using the information above. Justify your recommendation. (ii) Determine if the model is accepted or rejected at the 1% level for each hedge approach (I-II) based on your recommended test method in (i). Justify your response. (c) (2 points) Explain two issues with the hedge approaches that may not be apparent from the backtesting results