Combination matching or horizon matching creates a portfolio that is duration matched with the added constraint that it be cash-flow matched in the first few years. The disadvantage of combination matching over multiple liability immunisation is that the funding cost is greater.
How do you actually cash flow-match? Does it mean we have portfolio cash flows matching to liability cash flows?
Yes.
It’s a backward process, in this case, you start somewhere in the middle, then you for every liability cash flow you have, you see if there is an asset cash flow beforehand that can cover it (plus reinvestment), and keep working backwards while adjusting asset coupon rates, to make sure the cash flows in the early years are almost fully backed. Then you focus on the horizon-matching as in normal classical immunization without changing the former.
“Exhibit 18 and exhibit 19 … Illustration of Cash Flow Matching Process” – please look it up.