FI quiz

In which of the following areas would you be concerned with limiting the maturity variance? A) Cash-flow matching B) Portfolio immunization C) Enhanced index strategies

Not quite sure but IMO: A: Under this last liability payment is matched with principal payment of the bond and then moving backwards so any variance in the price of the bond will adversely impact the hedging !!! Is it?

a - need dispersion around the maturity date

I agree with A since you have to match the cash flow exactly.

I am going blank here.

Afraid not guys, the correct answer is B) Portfolio immunization The immunization risk measure may be called the maturity variance - it measures how much a given immunized portfolio differs from the ideal immunized portfolio consisting of a single pure discount instrument with maturity equal to the time horizon. Sneaky little sort of thing that CFAI loves to throw into an exam…

B? A - I think with Cash flow matching you select bonds to match the timing and amount of liabilities. So no question of maturity variance here. Hence, no reinvestment risk or immunization risk. C - With Enhanced Indexing strategy, you try to play around with risk factors and this could create some sort of variance. B - With immunization, you are concerned about duration matching and dispersion of cash flows on maturity dates etc. Just a hunch.

Wow, lucky guess. You managed to post the answer before I finished. Good question

well done sparty, it was actually a question I made up - was just reviewing my notes and saw the phrase mentioned and felt it was a good obscure term of the type which the examiners love to use.

Good Q newsuper… keep bouncing :slight_smile: