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102_Sol_0504

102_Sol_0504

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05/09/2014

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1
Actuarial Society of India
EXAMINATIONS
May / June 2004
SUBJECT - 102 : Financial Mathematics
Indicative Solution
2
Solution to Q1:

Motor insurance is one particular class of general insurance. Typically, a motor
insurance policy will provide cover for a period of one year. In return for a premium
received at the start of the year, an insurance company will accept the financial risks
that are associated with the policyholder\u2019s motoring.

While the amount and time of receipt of the positive cashflow (i.e. the premium) is
known precisely, the amounts and times (and number) of any negative cashflows are
uncertain. In many cases, the negative cashflows occur some time after the conclusion
of the period of cover. This is particularly common for injury-type claims for which
recovery time must be allowed and court settlements may be necessary.

Solution to Q2:
Consider a loan of Rs 100. The amount actually lent by the lender is Rs 97, and, after
a month, this has amounted to Rs 100. Hence if
)
12
(
i
is the nominal rate convertible
monthly
100
12
1
*
97
)
12
(
=
\ue004\ue004\ue005\ue003
\ue001\ue001\ue002\ue000+i
or
97
100
12
1
)
12
(
=
\ue004\ue004\ue005\ue003
\ue001\ue001\ue002\ue000+i
The corresponding effective rate is
=
1
12
1
12
)
12
(
\u2212
\ue004\ue004\ue005\ue003
\ue001\ue001\ue002\ue000+i
=
1
97
10012
\u2212
\ue004\ue005\ue003
\ue001\ue002\ue000
= 1.4412 \u2013 1
= 0.4412 = 44.12%
Solution to Q3:
Price of Rs 100 Treasury Bill
504
.
98
06
.
0
*
365
91
1
*
100
=
\ue004\ue005\ue003
\ue001\ue002\ue000\u2212
3
[1\u00bd marks]
Amount to be invested in 91 day deposit to give Rs 100 will be
479
.
98
365
0615
.
0
1
*
100
91
=
\ue004\ue005\ue003
\ue001\ue002\ue000+
\u2212
[1\u00bd marks]
\u2234 Deposit gives higher rate of return.
Solution to Q4:
Let Rsa be invested in Fund A and Rsb be invested in Fund B. It follows that
1000
07
.
1
*
05
.
1
*
20
20
=
+b
a
\u20261
10
10
07
.
1
*
*
50
.
0
05
.
1
*
b
a
=
\u20262
From2 above10
10
05
.
1
07
.
1
*
*
50
.
0
b
a=
Substituting this value in1 above
1000
07
.
1
*
05
.
1
*
07
.
1
*
*
50
.
0
20
10
10
=
+b
b
75
.
182
=
\u21d2b
10
10
05
.
1
07
.
1
*
75
.
182
*
5
.
0
=
\u2234a
35
.
110
=
\u21d2a
Amount of the combined fund after 5 years is given by
=
5
5
07
.
1
*
75
.
182
05
.
1
*
35
.
110
+
=
15
.
397
Solution to Q5)a):
The present value of the outgo at 3%
=
)
*
*
50
50
...
15
10
(
*
5000
9
9
2
\u221e
+
+
+
+
a
v
v
v
v

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