Liquidity premium

jjj820jjj820
in CIA.IFRS17-DR

Hi Graham,

Given that the higher the liquidity premium, the lower the FCF. A contract is onerous when FCF > LRC ex LC.

Does it mean that the investment with lower liquidity (high liquidity premium) lower the chance of a contact being onerous ?

Thank you

Comments

  • bulubalabulubala
    edited September 2022

    In practice, the reference portfolio used to determine illiquidity premium should match the liquidity of the underlying contracts. So I believe that you cannot just say, let's use investments with higher returns as our reference portfolio to lower the likelihood of onerosity.

    But mathematically speaking, if the illiquidity premium used to discount FCF is higher and your LRC is calculated using PAA with no discounting, then I guess you are right.

    This is just my opinion.

  • Staff-T1Staff-T1

    Bulubala is correct :)

Sign In or Register to comment.