What are the differences? -Classical is just matching the durations of assets to that of liabilities -Contingent Immunization allows for profits -Cash flow matching - Buy zero coupon bond to mature at latest liability and work backwards ?
More or less. Classical immunization is protected from a one-time shift in rates. Contingent immunization is triggered once you reach a breakpoint. Cash flow matching is most conservative. Not immunization at all, just making sure there will be enough cash flow to cover liabilities.
how do they rank in terms of trading costs?
Trading costs: lowest to highest (best guess): cash flow - contingent - classical?
But, not only trading costs are important --> total costs of implementation? Then, cash flow matching most costly!?
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CF matching has less transaction costs, it’s a one-time immunization.
However, CF matching takes more capital outlay to acheive the same $ of return. You typically have a lower assumed return % so it takes nominally more capital to fund the liability.
Contingent immunization has the most transaction costs as you’re constantly adjusting the portfolio to re-immunize the liabilities.
Generally, the lower-to-higher risk trade-off is: cash flow matching, immunize, contingent immunization, active management.
In terms of cost, cash flow matching matches cash flow better, but minimum immunization is cheaper.
OK. Thanks.
CF matching is more expensive to implement than classical immunization. In return, there’s no reinvestment risk with CF matching.