Answer for the puzzler

bulubalabulubala
in OSFI.MCT

https://battleactsmain.ca/wiki6c/OSFI.MCT-IFRS#.285.1-f.29_Puzzler

Not sure it is really a puzzler or just for fun lol
If it really is a puzzler, then I believe the answer is that interest rate changes can go negative.

Comments

  • grahamgraham

    Actually, I didn't expect anyone to give an answer! You're right that if the interest rate shock were -1.25% then the formulas as given would show the assets decreasing more than the liabilities and the result would be the same required margin of 1.625. For that scenario, the positive margin makes sense. (However, it still doesn't explain why the formulas imply a margin is required when the assets increase more than the liabilities.)

    In any case, there is an assumption in this margin formula, namely that the change in asset/liability values varies linearly with the change in interest rate which is a huge simplification, but makes the calculation more manageable.

    Anyway, I'll link to this post from the wiki. And for anyone reading this post, here is the place in the wiki being referenced:

    Thx @bulubala!

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