purelife Wrote: ------------------------------------------------------- > i said duration of 5 and cash flow match first > payment for combination matching. > > if you cash flow match the first payment then the > rest of your portfolio has a duration of 5? That’s what I thought. I didn’t know if in combination matching, you take out the cash flow matched portion of the portfolio and then use multiple liability immunization for the balance, or if you then use mli for the portfolio as it is assuming no cash flow matching. It does seem kind of silly to cash flow match the earlier liabilities but then include them again for mli. I’d think it’d be a wasteful strategy. Anyone look this up in the text? I’m too lazy…
I think Contingent is incorrect, because the client’s primary goal was to be certain that the liabilities were met–the question specifically asked which one best suits his *primary* goal, and stated that capital appreciation was a secondary goal.
i thought it would be .5 of 4 and .5 of 5 making it 4.5 equal to the duration of the immunization ?
i put cash flow matched and 5 duration.
Me too but this discussion still doesn’t convince me.
Worried about his forecast - I put CF match I also put duration 5 and CF for another one - I think - There was one asking about classical immunization - what was that?
i put classical.
Primary goal was meeting Liability due in x years. So i Put cash flow matching there. 4.5 with cash flow matching the first
Oh - i remember the one about classical now - it’s asking whether to use the range 3-6 is correct or not - I said YES.
contingent is the correct answer baby - obviously the immunization rate to use here is the rate of return required to building the swimming pool - and the yield curve is upward sloping and we begin the portfolio with a certain amount of safety margin - as long as the safety margin is met, we can use contingent immunization to maximze the return, in hope to be able to meet the secondary goal - if yield curve changed and the expectation is wrong, we start to lose money and if safety margin goes to 0, it become a passive management technique again (and therefore only be able to meet the primary goal) the other two answer doesnt make sense to me… i forgot what i wrote in the exam tho…
the question was really tricky. looks like contingent immunization, but: If you choose contingent, you need to consider, that even a passive startegy has immunization risk. When the yield curve twists or changes more than once! So to make sure you got zero risks, you should buy 2 zeros with term of 4 years and 5 years. no risk at all and duration of 4,5. thats cash flow matching.
I chose cashflow match because the PRIMARY goal was providing for a single liability.
purelife Wrote: ------------------------------------------------------- > i said duration of 5 and cash flow match first > payment for combination matching. > > if you cash flow match the first payment then the > rest of your portfolio has a duration of 5? exactly…Cash flow match was required for the first liab and it was required to match duration. Now cash flow tackles the first, the only duration left is the farther liab…wich is 5.i applied that logic. Additionally this wasnt a case of multiple liab immunisation and thus averaging didnt seem right to me
You can still use zero-coupon bonds to create your contingent immunization portfolio, there is no conflict on this superchef Wrote: ------------------------------------------------------- > the question was really tricky. > looks like contingent immunization, but: > If you choose contingent, you need to consider, > that even a passive startegy has immunization > risk. When the yield curve twists or changes more > than once! > > So to make sure you got zero risks, you should buy > 2 zeros with term of 4 years and 5 years. > no risk at all and duration of 4,5. thats cash > flow matching.
chaucy1999 Wrote: ------------------------------------------------------- > Oh - i remember the one about classical now - it’s > asking whether to use the range 3-6 is correct or > not - I said YES. Any takers?
akibe Wrote: ------------------------------------------------------- > I chose cashflow match because the PRIMARY goal > was providing for a single liability. except cash flow matching is for multiple liabilities I went with classical after a long debate in my head
i did too Jscott…
Both will work. If rate changes, classical immunization adjusts between reinvestment return and price change. Cash flow also works. Immunization gives flexibility for active investing and lower costs.
There were 3 questions, some of you were mixing it up.
isnt it cash flow for sure, specifically mentioend a risk of yield curve twist, which both types of imm dont deal with optimally?