in question 2a, statement 4, how is “I noticed that after a market runup, the equity premium lowered significantly. Also, during a market downturn, the reverse occurred.” related to “house money effect”? also in question 6, Mathew Mason is the chief investment officer at Empire Enterprise, and heads the board of the pension committee at the firm. During a meeting with Dubin, Mason stated that he would like to match the asset flows from the portfolio to the pension liabilities as they come due. He told Mason that since EE exports its products to Canada and Japan, it receives cash at irregular time periods. In order to reduce the cost of funding the liabilities, Mason wants to use these cash flows to satisfy pension payments as they come due, regardless of whether the inflows occur before, or after the payment date. In addition, he stated that EE would like to minimize the risk of non-parallel shifts in the yield curve at least at the short end of the curve, while keeping costs low. Determine the strategies that would be most appropriate to achieve Mason’s objectives related to cash flow use and minimization of the risk associated with non-parallel yield curve changes. anybody?
horizon matching
Why do you think it’s horizon matching??
definitely horizon matching- the statement about minimizing risks on the short end of the curve/twists is the tip off vs just immunization.
Its also called “combination matching” in case someone was wondering
Here’s the solution: Objective: Cash flow use Strategy: Symmetric Cash Flow Matching Explanation: This strategy allows cash flows occurring both before and after the liability date to be used to meet a liability by allowing for short-term borrowing of funds. This also results in a reduction in the cost of funding a liability. Objective: Minimization of the risk associated with non-parallel yield curve shifts Strategy: Combination/horizon matching Explanation: This strategy creates a portfolio that is cash flow matched in the first few years and hence, reduces the risk of nonparallel shifts of the yield curve at the short end. The portfolio is also duration matched. It is less costly to implement than basic cash flow matching.
lol you just copy pasted it form the solutions. yeah thats correct