Reading 22 EOC q27

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Goodearth100

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Hi there,
im referring to R22 EOC Q27
“… Which is currently fully funded utilise get a standard immunisation approach with noncallable bonds.”
then why is cap risk a factor????
 
I’d say that it’s not a risk factor; it appears that CFA Institute erred.
I encourage you to e-mail them and ask. If you do, please let us know their response.
 
is this the Choo question? Bcos q 27 is familiar.
and this one referred to Contingent Claim risk - not Cap risk if I recall.
I had asked the same question when I studied for my exam - and here is the answer I received then…
“Choo is responsible for the funding of the liabilities. There may be contingent claim risk in the liabilities that must be funded, which is distinct from the risk in HOW he funds. I hope this helps.”
 
ans in my book (from 2014) says
27 A is correct. Cap risk, interest rate risk, and contingent claim risk are all risks the portfolio manager faces.
question choice c - said no contingent claim risk, b - no interest rate risk. a - Yes …. (meaning all risks are issues).
(The answer to me from CFAI was because I had thought given the no-callable bonds being used - there is no contingent claims risk).
 
I had the same problem with this question. To me answer is C - no contingent claim risk given portfolio has non-callable bonds. I can’t think of anything else.
 
and the answer to that exact statement was …
Choo is responsible for the funding of the liabilities. There may be contingent claim risk in the liabilities that must be funded, which is distinct from the risk in HOW he funds.
 
Hahahahahah…..
i got the same reply!!!!!!
Thank you for your query; the text is correct as given. Choo is responsible for the funding of the liabilities. There may be cap risk in the liabilities that must be funded, which is distinct from the risk in how he funds. I hope this helps.
hahahahahahahah!!
they archive they replies?
 
If Choo is responsible for funding the liabilities which have cap risk, meaning the liability will be capped. Then why is it a risk to Choo?
 
Because it’s an uncertainty that will affect Choo’s future cash flows.
Risks aren’t necessarily bad; merely uncertain.
 
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