In a contingent immunization strategy, which of the following is a reason why the minimum target return might NOT be realized? The minimum target return might not be realized because: A) there is a rapid market yield movement. B) interest rates move in a nonparallel manner. C) the yield volatility changes. Your answer: B was incorrect. The correct answer was A) there is a rapid market yield movement. A rapid market yield movement might not give the manager enough time to shift from an active strategy to immunization mode to achieve the minimum target. Don’t follow this - can someone explain? I thought immunization would not protect against a non-parallel shift in the YC?
If there is only zero payment (like zero coupon bond) to meet. Parallel shift or twist makes no difference.
sorry, typo If there is only a"single" payment not zero.
Both b and C are taken care of by this immunization. Only right answer is A.
Immunization is a duration based strategy, how is it taking care of a non-parallel shift in the YC then?
In CI you group the maturities around the target with zero coupons. So the liability and the assets move together since they have the same duration and there are no payments stretched over the yield curve to mess with duration. Zero coupon bonds aren’t affected by twists since the whole payment is on a single point.