Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Joe Cummings is the fixed income manager of a large Canadian pension fund. The present value of the pension funds portfolio of assets is CAD

Joe Cummings is the fixed income manager of a large Canadian pension fund. The present value of the pension funds portfolio of assets is CAD 4 billion while the expected present value of the funds liabilities is CAD 5 billion. The respective modified durations are 9.254 and 6.825 years. The fund currently has an actuarial deficit (assets < liabilities) and Joe must avoid widening this gap. There are currently two scenarios for the yield curve: The first scenario is a downward shift of 25bp, with the second scenario an upward shift of 25bp. The most liquid interest rate futures contract has a present value of CAD 68,336 and a duration of 2.1468 years. Analyzing both scenarios separately, what should Joe do to avoid widening the pension fund gap? Choose the best answer. Scenario 1 Scenario 2 (a) Short futures Long futures (b) Long futures Short futures (c) Short futures Short futures (d) Long futures Long futures

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technical Analysis Of Stock Trends

Authors: Robert D. Edwards, John Magee, W.H.C. Bassetti

10th Edition

1439898189, 978-1439898185

More Books

Students also viewed these Finance questions