A. What are the main features and usage of each?
Concept: Contingent immunization - you want to immunize a liability, while retaining the benefits of active management. You can remain immunized until your portfolio value falls below your floor value. The floor value is the value of the liability, discounted at the available immunisation rate. Multiple Liability Immunisation - you want to immunise a set of liabilities. Set your duration of your liabilities equal to the duration of your assets. Have the maturities of your assets bracket the maturities of your liabilities. I’m sure of the above, I also think that Multiple Liability Immunisation only works for a one time parallel shift of the yield curve. You can improve on this by using functional (key rate) durations. Correct me if I’m wrong.
“Contingent immunization - you want to immunize a liability, while retaining the benefits of active management. You can remain immunized until your portfolio value falls below your floor value. The floor value is the value of the liability, discounted at the available immunisation rate.” I think the wording is off here. You can remain ACTIVE until your portfolio falls to the floor (aka - you eat away at all the cushion) at which point you would have to move from contingent to full imunization. Have the be careful that a huge i rate shock doesn’t push the portfolio below the floor rapidly - otherwise you can’t employ full imunization to meet liability needs.
Cash flow matching - set it and forget it. Passive strategy. Disadvantage is it doesn’t let the manager take advantage of perceived interest rate opportunities, not flexible.
one goal of multiple liability immunization is trying to having enough liquidity when these liabilities come due
bpdulog Wrote: ------------------------------------------------------- > Cash flow matching - set it and forget it. Passive > strategy. Disadvantage is it doesn’t let the > manager take advantage of perceived interest rate > opportunities, not flexible. Also requires more assets (or higher cost) since it generally has a lower rate of return then Multiple Liability Immunization
- Contingent => set a floor and you can actively manage your portfolio to earn excess return as long as its value is higher than the floor + Multiple liability: actively manage your portfolio to match Duration asset = duration liability; PV of asset = PV of liability and range of distribution of asset duration is larger than that of liability + Cashflow matching: Determine required cashflow along time horizon of liability and match cashflow of asset with required payment to liability. + Combination matching = multiple liability + cashflow matching (better matching but also more expensive) That’s all