Answer Happy

Question 1 [25] MNM Insurance anticipates that its losses will increase in the following year and as the risk manager you would want to hedge against this risk Currently the index stands at a loss level of 70% This amounts to an index level of 0 3 or R300 000 per contract If the loss ratio declines as anticipated to a level of 75%, it will equate to a level of 0 25 which amount to R250 000 per contract Losses of R3 billion are expected for the 10 companies using the pool 75% of these losses will be reported at the end of the quarter Total premiums for the companies is R40 billion Assume that MNM Insurance's earned premium is R200 000 000 a How would you structure your hedge for MNM Insurance using a futures contract in light of the information supplied above? (5) b Calculate the price per contract for the futures (5) How many contracts should you buy for MNM Insurance? (5) d Discuss the pros and cons of using alternative risk transfers (10) с