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Derivatives: Forwards vs Futures

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  Before understanding what is derivative, let’s learn what is underlying asset. Underlying asset: Underlying asset can be real asset such as commodities, gold etc or financial assets such as index, interest rates etc. Derivatives: ·         These are financial instruments who value depend upon or is derived from some underlying asset. ·         A derivative does not have its own physical existence, it emerges out of contract between the buyer and seller of derivative instrument. ·         Its value depends upon the value of underlying asset. Hence returns from derivative instruments are linked to returns from underlying assets. ·         The most common underlying assets are stocks, bonds, commodities, market indices and currencies. ·         Derivatives are mainly used to control risks. They can be used to reduce risks (a process known as hedging) or to increase risks in order to enhance returns (speculation)   Classification of Derivatives: ·         Broadly we c

Do you know the difference among MWRR vs TWRR vs LIRR?

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We can decide between various projects that which one is better and which one is not on the basis of different criteria such as: NPV, IRR, DPP But how can we measure the investment performance? Well, there are basically three measures of investment performance: 1.      Money Weighted rate of return (MWRR) 2.      Time Weighted rate of return (TWRR) 3.      Linked internal rate of return (LIRR) It is necessary to measure the performance of a fund which can be a pension fund, funds of an insurance company or funds of an asset management company. It is important for those who are responsible for the investment funds for example: trustees in case of pension fund will monitor how fund is performing i.e. they find out the rate of return of the fund and then compare it with performance of other funds. Before looking at different measures, let’s see some definitions: Income generate by fund : it includes interest payments, dividends received from the fund assets. Change in market v

IBNR vs Case Outstanding Reserves: General Insurance in a simple english

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Now basically there are two types of reserves: IBNR which is done by actuaries and other is "Case Outstanding" which is done by claims professionals. Let's see the example: I am insurer and now insured called me they met with an accident and wants to claim. Now our person will go there and find out that there will 1000$ payment. So now that 1000$ will be case outstanding. Suppose he pay 500$ upfront and keep reserves for 500$ then paid amount =500$ and case outstanding = 500$. Reported claims = paid claims + case outstanding =500+500=1000$. Now what about IBNR? Follow us on Linkedin:  Actuary Sense Follow us on Instagram:  Actuary Sense IBNR is based on the retrospective approach that is past data, it will look at the reported claims and then project accordingly. It has nothing to do with individual claims, it will look at aggregate number of claims and amount paid IBNR is an actuarial estimate of future payments on claims that have occurred but have not yet been reported

Bayesian Statistics: In a layman terms

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  What is Bayesian Statistics: (I will try to explain in easy terms)   Often researchers investigating an unknown population parameter have information available from other sources in advance of the study that provides a strong indication of what values the parameter is likely to take. This additional information might be in a form that cannot be incorporated directly in the current study. The classical statistical approach offers no scope for the researchers to take this additional information into account. However, the Bayesian statistics is the approach which allows to take this additional information into account while estimating a population parameter.   Let me explain you with the help of an example:   4 championship races had been done between Mr. A and Mr. B.  Out of which A has won 3 races and B has won 1 race. So, on whom are you going to bet your money in the next race? You will Say Mr. A because P(A) = 0.75 and P(B) = 0.25 So your initial estimate about B is

Do you know the difference between NPV vs IRR ?

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NPV:  popularly known as Net present value. This is the difference between the present value of cash inflows and cash outflows. If you are investing in certain investments or projects if it produces positive NPV or NPV>0 then you can accept that project. And in case of negative NPV or NPV<0, you should not accept the project. Now there are some advantages and disadvantages: Advantages: It helps you to maximize your wealth as it will show your returns greater than its cost of capital or not. It takes into consideration both before & after cash flow over the life span of a project. It considers all discount rates that may exist at different point of time while discounting back our cashflows. Disadvantages: Calculating Appropriate discount rate is difficult. It will not give accurate decision if two or more projects are of unequal life. It doesn’t provide accurate answer at what period of time you will achieve positive NPV. IRR : also referred as “yield to redemption

Actuarial Terminologies for General Insurance

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 Let's discuss some of the Actuarial Terminologies specific to General Insurance: Gross Direct Premium : Premium received from direct business written Gross Written Premium : Gross Direct Premium + Premium received on reinsurance accepted Net Premium : Gross Written Premium- Premium paid on reinsurance ceded.(by ceded we can say passed) These three are very simple and related to each other. Now lets move further towards claims. Gross Claims Paid: Claims paid on direct business written + Claims paid on reinsurance accepted. Net Claims Paid : Gross Claims Paid - Claim amount received from reinsurance ceded(i.e. passed) These two are also very simple. Lets move further to Commissions. Gross Commissions : Commission paid on direct written business + Commission paid on reinsurance accepted. Net Commission : Gross Commission - Commission received with respect to reinsurance ceded. "So what happens basically is that when as an insurer, i take a reinsurance then re

Components of Solvency II in a Layman Language - Phase 2 - Actuarial

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Now let’s understand these terminologies in a simple English. Assets: Assets are generally valued at market value which is easily available for the quoted securities. For the unquoted, we generally use fair or economic value i.e. the price at which assets can be exchanged or liability can be settled. Under Solvency I, they use book value i.e. original cost possibly with depreciation. There are various methods of valuing assets such as: o    Market value o    Fair value o    Discounted Cashflow approach o    Arbitrage approach o    Smoothed Market value o    Written down value Best Estimate Liability: First of all let’s understand what is best estimate ? So there are 3 strength of basis i.e. o    Optimistic – Here the assumptions are set in such a way that places higher value on assets and/or lower value on liabilities. It means my surplus will be higher, profit will be higher and thus taxes paid will be higher o    Prudent – Here the assumptions are set in such a wa