Work on the following;

Consumer surplus is: A. the area above the market price but below the demand curve. B. a measure of the net welfare buying a particular good gives to consumers. C. the difference between the dollar amounts people would willingly pay for specific quantities of goods and the amounts they pay at market prices. D. less for goods that are luxuries than for necessities. E. all of the above. Discuss the following; Negative production externality. Private marginal cost. Marginal damage. Social marginal cost. A vital aspect of the graphical analysis of externalities is knowing which curve to shift, and in which direction. Discuss the four possibilities. Discuss the problems with Coasian Solutions. Discuss the public sector remedies for externalities. (9 points) ABC Life issues both universal life and group term life insurance. ABC is concerned with surplus strain and is considering reinsuring its individual life insurance policies to XYZ Re, a non-licensed reinsurer. (a) (2 points) You are given the following reinsurance methods Yearly renewable term . Coinsurance (i) Describe how each reinsurance method alleviates surplus strain. (ii) Evaluate which method is more effective. (b) (1 point) Identify reasons ABC might choose modified coinsurance (Mod-co) instead of coinsurance with XYZ Re.ABC would like to transfer the risk on its group term life insurance business to a licensed reinsurer and is considering either indemnity reinsurance or assumption reinsurance. (c) (2 points) Recommend one of the two reinsurance methods based on their impact on the following: (i) Group term life policyholders (ii) Speed of execution (iii) Ability for ABC to recapture the business Justify your answer. ABC has decided to enter into a Mod-co treaty with XYZ Re. You are given the following information: Product Type Universal Life Face Amount 500.000 Premium Rate per 1,000 12 Annual Policy Fee 30 Commissions Year 1 75% Year 2 10% Premium Tax 2% Amount Reinsured 400,000 Guaranteed Mod-co Interest Rate 5% Mean Reserves per 1,000 Year 1 0.95 Year 2 7.15 Other Treaty Terms Reinsurance premiums are paid on an annual basis . No premium tax reimbursement . XYZ Re will pay ABC an allowance of 2% of all ceded premiums . XYZ Re can terminate the treaty at any time and force ABC to recapture the business . XYZ Re will not participate in any policy loans (d) (2 points) Calculate the ABC's Mod-co adjustment in year 2. Show all work. (e) (2 points) (i) Identify two reinsurance treaty terms which could cause concern from a regulatory risk-transfer perspective. (ii) Propose a better alternative for each. Justify your answers You are the Chief Risk Officer of a large European bank. The Board is concerned that its current trading activity is focused too heavily on products where margins are low (e.g. swaps, caps, and floors, FX and commodity options). It is therefore planning to expand into trading credit derivatives and inflation swaps, and is also considering setting up an advisory service for companies to tackle their pension deficits, including offering hedges for longevity risk. The bank intends to hire a number of senior managers, who will build suitable models and set up the necessary support infrastructure. The Board has asked you to submit a report assessing the proposals from a risk perspective. Set out the points you would cover in your report, which should address at least the following four areas: any additional risk factors to which the firm will be exposed how hedges of these risk factors might be achieved important control aspects of the new businesses potential modelling problems You should focus entirely on the risk aspects of the proposal, and can assume that others have provided an underlying business strategy (explaining how the new products will be used), a detailed description of the workings of the products themselves and an assessment of any resourcing and system requirements. You should also bear in mind that the Board is already fully familiar with standard market and credit risk issues relating to the existing derivatives operation