Examples%20and%20Applications

1
Examples and Applications

• Savings and loan industry
• Life insurance industry
• Recent financial disasters

2
The Savings Loans Business - The Good Years

• SL assets mostly long term maturity mortgages
• SL liabilities usually short term savings
  deposits
• Pre-1980s, upward sloping yield curve is formula
  for success
• Earn 6, Pay 3

3
The Savings Loans Business - The Bad Years

• Was the SL position a bomb waiting to detonate?
• 1980s - the yield curve inverts
• Still earn 6, but pay 12

4
Insurers exposure in the 1980s

• Life insurers allowed policyholder loans
• Loan rates had a ceiling fixed by the contract at
  issue
• Prior to 1980s, the ceiling exceeded rates
  available on earning assets
• Disintermediation
• Money flowed out of life insurers into short term
  instruments such as money market funds

5
Responses to financial volatility

• Derivative products
• Forwards and futures
• Swaps
• Options
• Application of risk management concepts to a
  firms balance sheet
• Finance 432 and seminars in financial risk
  management

6
Recent Disasters

• Long Term Capital Management
• Telecommunications industry
• Enron

7
Next time...

• A survey of financial topics
• Actuaries in finance
• Finance vs. insurance