Duration Immunization

I am a bit confused in fully comprehending the duration immunization, so if someone can help me grasp it.

My understanding for duration immunization is trying to immune yourself from volatilities in assets and liabilities durations (interest rate changes to price value). Hence, you try to select liabilities with same durations similar to assets (in other words, changes in interest rates are similar). If this interpretation is correct, do we care only about similar changes in duration or do we care about cash flows as well like the case with cashflow immunization.

Any help on this one?

You want the money duration of your assets to equal the money duration of your liabilities.

You have 3 options to defeasing liabilities:

Bond tender (expensive).

Cashflow matching (which works well but the govt bonds needed for cf matching can be expensive). Match Macaulay duration.

Duration matching (cheaper but wouldn’t work for non-parallel yield curve shifts). Match money duration.

I think you’re listing immunization strategies which also include two others:

  • Horizon Matching

  • Contingent Immunization

Defeasment would mean the debt can be taken off the books. That would only work with cash flow matching. The text said they wouldnt be allowed to use duration management to defease the bond due to the additional risks.