S15Q18 - Goldfarb RAROC

The examiner’s report shows losses discounted to time 0 and says:

Common errors included:
• bringing all values to t = 1 when it should be t = 0

Why is this an error? The Goldfarb paper says,

The loss payments are discounted to the end of the first year, to mirror a simplifying assumption that all outstanding losses are paid, on a discounted basis, at the end of the year.

Recall that the present value, or discounted, loss ratio reflects the value of the losses at the end of the year

Welcome to exam 9, the land of contradictions.

It’s not an error.