FI - CF matching and multiple liability immunization


Can someone explain the difference to me ?

Thank you very much.

Frank the Tank Z

Cash flow matching

  • Begin with choosing 1st bond with maturity equal to last liability payment date
  • Buy enough par value on this bond such that its principal+ interest satisfies your last year liability
  • Now start working backwards, choose 2nd bond which satisfies 2nd last year remaining liability (after adjusting for the first bonds coupons amount) & continue untill all liabilities are addressed

Multiple liability - i can think of 3 conditions now- ML is possible if following conditions are satisfied (for paraller shifts only)

  • PV of assets = PV of liabilties
  • Assets durations = liabilities durations (I guess min requirement to immunize Multi liab.)
  • Range of distribution of duration of assets should exceed range of distribution of duration of liabilities (Very imp)

I am sure i will forget this on the ‘D day’ 40 days from now :-/


Cashflows -

  1. Reinvestment assumptions: - depends upon all the cashflows so REINVESTMENt rate are imp (should be conservative) whereas in Multilple liability immu. AVERAGE reinvestment will do

  2. In Cash flow matching - cahsflows from a portfolio which are occuring prior to liability date are utlized to meet the obligations & in Multiple immunized - only need to have sufficient value at the time of liability date

CF Matching also requires a higher asset base than ML Immunization.