Contingent Immunization

Contingent immunization pursues active management until the rate of return is dropped to a safety rate at which point an immunization strategy is triggered. Now, i thought it was a one way street, that if immunization is triggered, there is no way to go back to active management strategy. I was doing EOC problems from Fixed income section Reading 30. Question #23 is a two part “correct/incorrect” statement question. One of the statements is “When interest rates fall, contingent immunization switches to more active management because the dollar safety margin is higher”. I chose Incorrect as i thought you could not switch from a immunized position once its triggered. Can somene explain why you can?

Interesting. I don’t remember this 100%, but IIRC, contingent immunization is triggered when whatever dollar cushion is exhausted. It is possible that if interest rates drop lower, you can surpass that dollar cushion and go back to active management (although that would probably be rare). It’s more common that if someone wants active management after you’ve gone to immunization, they just dump more cash into the plan and tell you to get started. Also, the question might not refer to a plan where you’ve switched to pure immunization. You could have an active plan, and interest rates drop, raising the dollar cushion, and that just tells you that you can afford to be “more active” than you were before (i.e. take larger risks).

Did same problem this pm and puzzled over answer. Figured numbers might explain so went to Schweser example on page 144 of Book 3 and did more numbers. Just proved that there is something I am missing. Wanted to ask someone who understood CI. Here are extrapolated numbsers from that example: i Current Value Min. Current Value $ Safety Margin 12% $15,870,551 $17,839,999 ($1,969,449) 11% $17,093,251 $18,353,347 ($1,260,096) 10% $18,462,755 $18,884,010 ($421,255) 9% $20,000,000 $19,432,661 $567,339 8% $21,729,203 $20,000,000 $1,729,204 7% $23,678,409 $20,586,756 $3,091,653 6% $25,880,132 $21,193,695 $4,686,438 5% $28,372,117 $21,821,612 $6,550,505 4% $31,198,228 $22,471,341 $8,726,887 3% $34,409,503 $23,143,752 $11,265,751 2% $38,065,396 $23,839,755 $14,225,641 1% $42,235,243 $24,560,299 $17,674,944 $25,306,380 Safety margin just keeps increasing as one goes below Safety Return. Obviously I do not understand CI. Appreciate input from anyone who does.

Shark777 : I used to think the same way. I used to see active/immunized as a black and white issue. Apparently the curriculum makes it a grey issue ; hence the “MORE active”. The greater the safety margin, the more active you are.

Found another example (Schweser slides pages 897 to 900) that goes the other direction - $ safety margin increases as i increases and decreases as i decreases. Went to an authoritative source and the answer is: One cannot generalize based on the direction of the interest movement. It is a function of the respective durations of the assets and liabilities. Hence the CFAI answer is an oversimplification based on one narrow example in the text. But thanks to this thread I will remember the CFAI (wrong) answer to use on the exam.