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The HR Director at a large employer is considering establishing an arrangement to meet in full all post-retirement medical fees and healthcare costs of its employees. (i) List the assumptions that would need to be made in order to estimate the cost of the arrangement. [5] (ii) Discuss three approaches the employer could take to financing the arrangement. [10] The Managing Director is concerned by the affordability of such an arrangement. He takes advice from an actuary on ways to control the cost, whilst still offering a benefit that is attractive to current and prospective staff. (iii) Discuss four key aspects of benefits design that could be adjusted to achieve the employer's objective. [12] [Total 27]Mr and Mrs Jones both wish to buy stocks in Widgets Inc. They don't have enough money right now, so they are considering buying either forwards or options on the stocks, both with a term of 4 years. The stock price at time 0 is 10 with standard deviation of 12% per annum. The stock does not pay any dividend. The continuously compounded risk-free rate of interest is 5% per annum. (i) Calculate the 4 year forward price on one stock. J. [1] (ii) Calculate the price at time 0 of a 4 year call option on one stock with a strike price of f12.21. [3] Mrs Jones enters into one forward contract, while Mr Jones buys one call option. At time 4 the stock is worth $12. (iii) Calculate the accumulated profit or loss at time 4 for Mrs Jones. [1] (iv) Calculate the accumulated profit or loss at time 4 for Mr Jones. [2] (v) Explain why Mr Jones makes a loss despite having an option that does not force him to buy the stock. [2] (vi) Calculate the range of stock prices at time 4 which would leave Mr Jones better off than Mrs Jones. 13]I A general insurance company has decided to move from modelling claims and premium reserves on a prudent basis to a best estimate basis in its stochastic capital model Suggest reasons why the company may have decided to do this. [3] Suggest, with reasons, which parameters within the capital model may change following the change in basis [4] The company has decided to roll-forward the model parameters relating to reserve risk instead of doing a complete re-parametersation. It currently uses a Log-Normal distribution to model the gross reserve risk for each class of business. (2) Suggest three different approaches that could be used to roll forward the model parameters (b) Discuss the potential impact on capital for reserve risk of each option [6]
