I read about somewhere that cash flow matching will not have reinvestment and immunization risk. However, when I am doing item set, it stated that it also is exposured to reinvestment risk. Can someone please kindly clarify for that? Many thanks!
well it wont have reinvestment if it EXACTLY matches. however imagine ur a manager chewing on a pencil, you have a 100m liability in 60 days time, and the assets you can buy mature at 50 days, or 70 days. You gotta buy the 50 one, and then put the proceeds somewhere (reinvest) for 10 days. In other words only in your dreams does it EXACTLY match up, based on whats available to buy in the market.
There is a Schweser exam in vol2 claims that cash flow matching does not have immunization risk, and i filed an errata, but they said they are right, even in their notes it says opposite.
Cash flow matching does a better job of minimizing immunization risk compared to minimum-variance liability matching. However, the costs are greater. The other problem with CF Matching is that they must use very conservative estimates for re-investment rates and as a result, more capital is usually required for the immunization strategy to be implemented. As a result, multiple liability strategy is at least as good as CF Matching, if not better.