Project scenario:

You are the principal of a consulting firm, IDSCDR²Inc. Your consulting firm provides two basic services to clients.First, you provide advice to clients that wish to reduce theirexposure. Second, you provide advice to clients that wish toimplement sophisticated, non-traditional strategies to takeadvantage of their market beliefs.

IDSCDR²‘s most important client is the insurancecompany RestLife, Inc. RestLife has contacted IDSCDR² toassist RestLife in implementing a plan that aligns RestLife’sexposure to RestLife’s market beliefs.

RestLife’s beliefs are twofold. First, they believe that therisk free rate of interest rates will increase dramatically overthe next six months. Second, they believe that BBB corporate willbe extensively downgraded by credit ratings agencies over the nextsix months while A, AA, and AAA corporate will retain theirexisting credit ratings.

Based on these beliefs, RestLife is looking forIDSCDR²‘s advice. Due to the proprietary nature of theirportfolio, RestLife will not provide IDSCDR² detailedcharacteristics of the portfolio regarding which RestLife isrequesting advice, beyond the following:

• Portfolio size: $3 billion.
• Exposure: 70% long BBB corporate, 20% long A corporate, 5% longAA corporate, 5% long AAA corporate.
• Duration: 50% of the portfolio matures between 5-10 years. 50%of the portfolio matures between 10-20 years.
• Securities: 60% corporate bonds, 40% syndicated loans.

RestLife is requesting IDSCDR² provide advice inrelation to the following strategies. Specifically, they would likeIDSCDR² to provide methodologies through which they cangain beneficial exposure to the forecasted downgrade of BBBcorporate and increase in the risk free rate.

RestLife emphasizes that they do not require IDSCDR²to actually perform the calculations required to implement theproposed strategy – indeed, they have not provided sufficientinformation to permit IDSCDR² to do so. Instead, theyrequire IDSCDR² input regarding the types of strategiesand calculations they should implement.

Teams will make a 25 - 30 minute presentation followed by aquestion and answer session with the reviewers. In addition, eachteam will submit a briefing book documenting their work. Thebriefing book will be in the form of a CD ROM. The following listof deliverables must be addressed in the presentation and thesequencing of the deliverables should remain the same as requestedby RestLife.

Deliverables:

1. Describe the characteristics of RestLife’s portfolio, includingthe portfolio’s exposures.