Classical is what I chose. The question had one cash flow and they were looking for only their primary goal in this case - minimizing risk of not meeting the required cash outflow. Setting it up with classical with PV and duration matched would provide this. Cash flow is used for multiple liabilities. For a single liability it would be called classical.
i agree hh. read schweser classical writeup last night and it basically says the exact same thing.
I can’t remember what the questions were other than the “combination strategy” one, which i picked cash flow matching the first liability and duration matching the second
But the case also said there was expectation for yield curve change (twist). In that case, classical is not appropriate.
I think it was cash flow matching as well b/c the second scenario actually created a multiple liability out of a single liability by dividing it over two years. Also, wasn’t there something in the CFAI text (haven’t read Schweser) that it would not be enough to average the durations of the liabilities to immunize multiple liabilities? Two answers had 4.5, one had cash flow matching and 5. But I could be wrong, saved that one for last b/c I wasn’t very confident on that one…
i think you guys may be correct. twist makes it not work. although cash flow is used for multiple liabilites
there were three difference questions, and i’m not clear which you guys are each talking about
monki Wrote: ------------------------------------------------------- > 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… Agree with you 100%. I went with contingent immunization as well.
Still weary on this, I put contigent because I missed the part about only conceared with providing for his primary goal, but then changed it to cash flow because it read that part. 1) Classical would not provide 100% assurance that he would meet his primary goal 2) Contingent would be the best choice if he wanted to meet with primary goal and add to the surplus 3) Cash flow matched seem to be the best choice, even if it is a single liability it is still possible to do this.