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“ Premium Liquidity “
Raymond Caesar Imannuel 120210100032 Hilman M Yasin 120210100040 Widyan Hindami 120210100044 Angga Andara 120210100059 David Natan Sagala 120210100060
. Untuk itu kritik dan saran dari semua pihak sangat penulis harapkan demi penyempurnaan pembuatan makalah ini.KATA PENGANTAR Puji syukur penulis penjatkan kehadirat Alloh SWT. dan dapat menjadikan semua bantuan ini sebagai ibadah. Dalam penulisan makalah ini penulis menyampaikan ucapan terima kasih yang tak terhingga kepada pihak-pihak yang membantu dalam menyelesaikan penelitian ini. mengingat akan kemampuan yang dimiliki penulis. Dalam Penulisan makalah ini penulis merasa masih banyak kekurangan-kekurangan baik pada teknis penulisan maupun materi. Akhirnya penulis berharap semoga Allah memberikan imbalan yang setimpal pada mereka yang telah memberikan bantuan. yang atas rahmat-Nya maka penulis dapat menyelesaikan penyusunan makalah mengenai Liquiditas Premium Penulisan makalah adalah merupakan salah satu tugas dan persyaratan untuk menyelesaikan tugas mata kuliah Badan Lembaga Keuangan. amin.
since tying up cash in an investment for a longer period of time exposes the investor to more risk. Definition of 'Premium' 1. where those particular investments are illiquid. The liquidity premium explains the shape of the yield curve. The total cost of an option. The investor will demand a better return to compensate for this risk. 3. The upwards-curving component of the interest yield can be explained by the liquidity premium. organized liquidity and transparency make the value of quoted share higher than the market value of an unquoted share. 2.Premium Liquidity Premium Liquidity : The premium required by investors investing in long-term debt. and primarily compensates the insurer for bearing the risk of a payout . Assets that are traded on an organized market are more liquid. is called the liquidity premium. Liquidity risk premiums are recommended to be used with longer term investments. The premium is paid by the insured party to the insurer. Therefore investors expect a premium. Liquidity premium is a segment of a three-part theory that works to explain the behavior of yield curves for interest rates. For a given economic result. The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time. The difference between the higher price paid for a fixed-income security and the security's face amount at issue. The reason behind this is that short term securities are less risky compared to long term rates due to the difference in maturity dates. Financial disclosure requirements are more stringent for quoted companies. or risk premium for investing in the risky security. The difference in the prices of two assets. which are similar in all aspects except liquidity.
and the implications this has for the behaviour of the valuations of different types of liabilities. These approaches derive liquidity premium estimates by comparing the prices of two assets that are equivalent except for liquidity. estimating the illiquidity of the insurance liabilities. and 3. application of the liquidity premium estimate (stage 2) in the market-consistent valuation of the liability. There is no specific liquidity formula. liquidity is often calculated by using liquidity ratios. 2. The methods differ by the choice of assets that are used for this comparison. This note explores how market-consistent liability valuation methodology can be adjusted to allow for liquidity premiums. The first two stages Considerable work has been done in this area and a number of methodologies have emerged for the estimation of the liquidity premiums that can be found in asset classes such as corporate bonds. Measuring the relative liquidity of insurance liabilities . Liquidity is characterized by a high level of trading activity. so as to derive the liquidity premium applicable to the liability under consideration. 2.Definition of 'Liquidity' 1. Also known as "marketability". Incorporating an allowance for liquidity premium into the market-consistent valuation of insurance liabilities is a three-stage process: 1. Assets that can be easily bought or sold are known as liquid assets. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. and whether these assets have market prices that can be directly observed or need to be estimated by a model. estimating the liquidity premium embedded in asset prices. however. The ability to convert an asset to cash quickly.
so get 100% of the liquidity premium). life insurance contracts with profit participation (deemed somewhat illiquid. but offers a less arbitrary and more granular approach to liability liquidity assessment. although interestingly.The next stage of the process involves determining the liquidity of the liability. Barrie & Hibbert published research in December 2009 that explored a more granular and sophisticated modelling approach to measuring liability liquidity. the adjustment is minor: add the liquidity premium to the risk-free yield curve and discount those expected cashflows using the adjusted yield curve. Relative to the QIS 5 method. the fifth quantitative impact survey (QIS 5) specification has taken a simplifying approach by assuming that liability liquidity can be grouped into four buckets: liabilities maturing in less than one year (assumed to be perfectly liquid. so get 0% of the liquidity premium). This isn’t necessarily a binary decision. it is a modelling approach that inevitably involves more model and parameter choices. how should it be incorporated into the valuation of insurance liabilities? For liabilities of a sufficiently simple form that market-consistent valuation only requires the discounting of expected liability cashflows using a risk-free curve. Its central idea is that the liquidity needs of a liability can be assessed by measuring how often a matching asset portfolio needs to be rebalanced due to unexpected changes in the liability cashflow outcomes. A Measure of Liquidity of Liabilities. and therefore get 75% of the liquidity premium). and everything else (gets 50% of the liquidity premium). immediate annuities (assumed to be perfectly illiquid. . due to unexpectedly high mortality rates in an immediate annuity book. Market-consistent valuation methodology for illiquid liabilities Once armed with an estimate of the applicable liability liquidity premium. for example.
This is broadly intuitive in the sense that if the intention was to keep the valuation basis consistent with the pre-liability-premium basis. and there is no obvious reason for this derivation to assume the market is using the same liquidity premium adjustment in its derivative valuations as QIS 5. The natural next step is for risk-neutral valuation to then proceed as usual – this adjusted yield curve is used both in the risk-neutral stochastic projection of the assets and in the discounting of the resultant contingent liability cashflows. Put another way. in the UK. so why should it have to be consistent with swaption prices? We use option prices to derive market-implied volatility levels. . there would be no reason to change it in the first place. the approach is again quite simple: the risk-free yield curve used for the valuation is directly adjusted for the addition of the liquidity premium. The approach of merely adjusting the starting yield curve has the benefit of apparent simplicity. This implementation sounds simple. But it should be noted that retaining a fit-to-option implied volatilities instead of option prices arguably contravenes aspects of the draft QIS 5. the standard practice has been to not recalibrate the model’s volatility parameters. regulatory capital assessment).What about more complex liabilities such as those that require market-consistent simulations to value them? In QIS 5. and it is expected to be the same for QIS 5 and Solvency II implementation. The following example illustrates this effect. but one area of potential confusion and ambiguity that can arise here is over whether the stochastic model’s volatility parameters should be re parameterised so that the calibration undoes the impact of the liquidity premium adjustment on the model’s fit-to-option prices. but it will produce a counter-intuitive effect: the inclusion of the liquidity premium will reduce the value of some forms of contingent liabilities (as expected). Where liquidity premiums have been used to date (MCEV and. a swaps + 20 basis points calibr ation isn’t consistent with swap prices. but will result in an increase in the valuation of some contingent liabilities – options and guarantees that increase in value when interest rates increase.
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