Related to reading 21 question 8. Assets duration = 6 Liability duration = 4 Risk is high because of the duration mismatch So the answer is to invest in shorter duration bonds Interest rate is expected to rise, so it works out perfectly (since shorter duration means smaller loss of capital if int. rate does rise). However, if the interest rate were expected to fall instead, should we still invest in shorter duration bond to fix the duration mismatch, or should we continue with the longer duration to capitalize the potential gain from interest rate changes?
Depends on the goal of the portfolio. A DB plan with little room for risk might shorten duration if the goal is to minimize the risk to the surplus. Really comes down to the appetite for active management.
yes depends on what you want to do. For example if you wan to imminize, then you will want duration of asset and liab to be matched, no matter the expected change in inerest rate.
Thanks, all. It does seem safer to match duration first so the insurance business isn’t sensitive to IR changes. After all, the main business is to provide insurance rather than asset management.