Chapter 16: Unit Pricing

Question 1

Internal UL fund

Answer 1

Clearly identifiable set of assets linked to the UL policy. Performance of units relates to the performance of this fund.

Question 2

Risks of maintaining a management box: (3)

Answer 2

• Value of underlying assets goes down
• Expenses in managing the box higher than expected
• Operational risk – tracking the #’s

Question 3

“Basic equity principle” of unit pricing for internal fund:

Answer 3

The interests of unit-holders not involved in a unit transaction should be unaffected by the transaction.

Question 4

Appropriation price

Answer 4

• Price at which company will create a unit.
• Amount of money the company should put into the fund wrt each unit it creates to preserve the interests of unit-holders.
=> Best price at which underlying assets can be purchased net of dealing expenses.

Question 5

Expropriation price

Answer 5

• Price at which company will cancel units
• Amount of money the company should take out wrt unit cancellations to preserve interests of continuing unit-holders.
=> Best price at which underlying assets can be sold net of dealing expenses.