ASSET LIABILITY MODELS Flashcards
Why are derivatives important for A-L matching?
Flexible
Cheaper
- tax and costs
- capital efficient
Guarantees
- sort out investment guarantees
- WP guarantees sorted (put option)

Derivatives do the following:
- don’t need to tie up as much capital by buying physical assets eg buy interest rate swap instead of long term bond holding.
- reduce tax or investment costs by buying futures instead of equities for example.
- allows for quick and efficient changes to exposure to certain assets without trading massive volumes of physical assets which can be expensive and can shift the market.
- WP contracts can have guarantees. To ensure these obligations can be met - buy put option to avoid downside risk.
- provide the exposure required to match the investment guarantees underlying some contracts, such as guaranteed equity bonds or variable annuities. Derivatives can replicate that exposure.
