I pick B —(C/F matching is expensive; Easiness or not is subjective). First, cash flow matching requires a relatively conservative rate of return assumption for short-term cash and cash balances may be occasionally substantial. By contrast, an immunized portfolio is essentially fully invested at the remaining horizon duration. Second, funds from a cash flow–matched portfolio must be available when (and usually before) each liability is due, because of the difficulty in perfect matching. Because the reinvestment assumption for excess cash for cash flow matching extends many years into the future, a conservative interest rate assumption is appropriate. An immunized portfolio needs to meet the target value only on the date of each liability, because funding is achieved by a rebalanc- ing of the portfolio. Thus, even with the sophisticated linear programming techniques used, in most cases cash flow matching will be technically inferior to immunization. Cash flow matching is easier to understand than multiple liability immuniza- tion, however; this ease of use occasionally supports its selection in dedication portfolio strategies. (Level III Volume 4 Fixed Income and Equity Portfolio Management , 4th Edition. Pearson Learning Solutions p. 46).
A- if the cash flow from bond already match the liability, there’s no need to rebalance once constructed. hence easier to maintain after construction. the hard part is finding the right bond to match the cashflow of liability.
from reading Stalla, my understanding is that Cash flow matching is more expensive upfront, but easier to maintain. Immunization costs less upfront, and is more difficult to maintain due to having to rebalance all the time. I say A. Where is this question from?
I got the question from Stalla. I thought it was easy when I saw it and chose B. Stalla says the answer is A. That was what prompted me to post it here to sample opinions. I had to be sure I did not misinterpret what I read and the responses I got proved it. Using the knowledge from CFAI text, one is tempted to go for B. I am sure that the markers will be divided on the answer to this question. This kind of question will not come out in the exams. It is too ambiguous.
thanks for this ,…def got the blood flowing likelooking through the window at _______'s mom