Contingent Immunization and Return Maximization

What’s difference between Contingent Immunization and Return Maximization ?

http://www.analystforum.com/phorums/read.php?13,757979

idreesz, Thank you ! I took a look at those messages, but I still do not have a clear concept. Anyone else can explain tangibly/clearly ?

In return maximization, you try to create a portfolio of bond that will have the highest risk adjusted return. In contingent immunization, you immunize the portfolio against a certain return and the excess cash above the funds needed to immunize the return is managed actively in order to generate better returns.

After re-reading immunization, I finally figured what the hell it is all about. Immunization is always about achieving the required return with respect to some liabilities. The main purpose is to ensure that the assets returns would pay for the liabilities. It is all about ALM!!! I just cannot understand why can’t the text simply say it clearly in simple ENGLISH!!!

me.tega: It’s not clear that under contingent immunization you immunize the portfolio against a certain return and the excess cash above the funds needed to immunize the return is managed actively in order to generate better returns. CFAI vol. 4, page 154: “…utilizing a CI approach…he can use the entire fixed-income portfolio for active management until the portfolio drops below the safety net level or the terminal value”. Later on, on page 160, the solution to question 24 confirms that CI “does utilize the entire portfolio for active management”. So what’s the conclusion? Under CI, do you utilize the excess cash or the whole portfolio for active management?

it is my understanding that you actively manage the entire portfolio under CL but once it goes below your minimum target level you must stop immediately

bell99 Wrote: ------------------------------------------------------- > After re-reading immunization, I finally figured > what the hell it is all about. > > Immunization is always about achieving the > required return with respect to some liabilities. > The main purpose is to ensure that the assets > returns would pay for the liabilities. It is all > about ALM!!! I just cannot understand why can’t > the text simply say it clearly in simple > ENGLISH!!! IMO, it is not only the problem of “English”, it is also not systematic and not logic in some respects.

* Contingent Immunization is a mix of active and passive strategy. * Is Contingent Immunization similar to CPPI strategy?

mcap11 is correct. active management until the minimum target is breached, then flip the switch to immunization… they have asked questions about how this could be problematic… if there is a sharp interest rate shock upwards, then the portfolio could hypothetically drop well below the minimum target return, and by the time you switch then its too late… that is for a SHARP interest rate shock, though.

deriv108 Wrote: ------------------------------------------------------- > * Contingent Immunization is a mix of active and > passive strategy. Semi-active ? I remember it is said this is active !

Sounds like CPPI.:slight_smile:

alta168 Wrote: ------------------------------------------------------- > deriv108 Wrote: > -------------------------------------------------- > ----- > > * Contingent Immunization is a mix of active > and > > passive strategy. > > Semi-active ? I remember it is said this is active > ! I didn’t say it’s semi-active.:slight_smile: If cushion spread > 0, it’s active; If cushion spread < 0, it’s passive or immunized;

deriv108 Wrote: ------------------------------------------------------- > If cushion spread > 0, it’s active; > If cushion spread < 0, it’s passive or immunized; Agree !

Return maximization is maximizing return without regard for liabilities. Contingent immunization attempts to maximize return while keeping in mind the liabilities.

Review Q: Can corporate bond be used for immunization? If not, why?

Not great due to credit risk.

Ashwin Wrote: ------------------------------------------------------- > Return maximization is maximizing return without > regard for liabilities. > > Contingent immunization attempts to maximize > return while keeping in mind the liabilities. It makes sense to me ! But this reading is talking about managing liability (ALM).