3 main risk of Immunization are interest rate risk contigent claim risk cap risk. What about credit risk?
Immunization assumes bonds aren’t going to default and assumes liquidity.
Most bonds don’t default so I guess thats why its not a Main risk. Also, you can bypass this risk by usuing Treasuries.
CFAI book page # please if you can?
haha… CSK if you are referring to my post, I dont have the books on me, I’m at work 
So am i !
I remember the same assumptions Mr.Good.Guy mentioned: no default, high liquidity and no embedded options (else duration is difficult to estimate)
tanyusha Wrote: ------------------------------------------------------- > I remember the same assumptions Mr.Good.Guy > mentioned: no default, high liquidity and no > embedded options (else duration is difficult to > estimate) if no embedded options there would be no contigent claim risk. So that is incorrect
Ok, I worded it wrong. Those are three things you need to take into consideration when immunizing the portfolio (default, liquidity and embedded options).
comp_sci_kid Wrote: ------------------------------------------------------- > 3 main risk of Immunization are > > interest rate risk > contigent claim risk > cap risk. > > What about credit risk? Wait intererst rate risk I thought that immunization neutralized interest rate risk? But only for small parallel movements but it still has yield curve risk.
don’t have my books here, what’s contigent claim risk?
not exactly, cfa mentions that nowhere schweser includes a paragraph called “bond characteristics to consider”, talking about credit rating (they assume no defult), embedded options (more difficult) and liquidity (important) but, strictly, only cap risk, contingent claim risk, and interest risk are defined in CFA text the funny thing is that, in 2006 multiple choice (included in cfa text, end of chapter), one guy says that “to remove all risk” you should get duration assets = duration of liabilities and pv assets = pv liabilities, and the answer is NO, YOU ARE STILL SUBJECT TO CREDIT RISK
hala_madrid Wrote: ------------------------------------------------------- > not exactly, cfa mentions that nowhere > > schweser includes a paragraph called “bond > characteristics to consider”, talking about credit > rating (they assume no defult), embedded options > (more difficult) and liquidity (important) > > but, strictly, only cap risk, contingent claim > risk, and interest risk are defined in CFA text > > the funny thing is that, in 2006 multiple choice > (included in cfa text, end of chapter), one guy > says that “to remove all risk” you should get > duration assets = duration of liabilities and pv > assets = pv liabilities, and the answer is NO, YOU > ARE STILL SUBJECT TO CREDIT RISK HERE WE F GO@!!@! That is why i remember this! Good! Now i just need page # that says credit risk is a risk to consider!
is not there, is only in the question at the end of the chapter 
I think the point here is that you will always have some risk (and I am sure we will have one of this questions): if you match durations and PVs, you still have the risk of non parallel shifts of the curve, and credit risk. and even if you find the perfect zero coupon bond with no reinvestment risk and no risk of nonparallel shifts, you will still have credit risk i think that, unless you find a zero coupon bond, issued by the gov, with same pv and duration as your liability, you will always have some risk when performing immunization
hala_madrid Wrote: ------------------------------------------------------- > is not there, is only in the question at the end > of the chapter > > I think the point here is that you will always > have some risk (and I am sure we will have one of > this questions): if you match durations and PVs, > you still have the risk of non parallel shifts of > the curve, and credit risk. and even if you find > the perfect zero coupon bond with no reinvestment > risk and no risk of nonparallel shifts, you will > still have credit risk > > i think that, unless you find a zero coupon bond, > issued by the gov, with same pv and duration as > your liability, you will always have some risk > when performing immunization there was a question like that. you can have 0 immunization risk as the scenario you mentioned below. My question: if duration matches and PV matches, do we still exposed to interest rate risk yes or no? My answer is no
True, you will “always” have credit risk, but it may not be a “main” risk…
if duration and pv match, then you are not exposed to interest rate risk.
bigwilly Wrote: ------------------------------------------------------- > True, you will “always” have credit risk, but it > may not be a “main” risk… so is credit risk a part of immunization risks :)?
comp_sci_kid Wrote: ------------------------------------------------------- > hala_madrid Wrote: > -------------------------------------------------- > ----- > > is not there, is only in the question at the > end > > of the chapter > > > > I think the point here is that you will always > > have some risk (and I am sure we will have one > of > > this questions): if you match durations and > PVs, > > you still have the risk of non parallel shifts > of > > the curve, and credit risk. and even if you > find > > the perfect zero coupon bond with no > reinvestment > > risk and no risk of nonparallel shifts, you > will > > still have credit risk > > > > i think that, unless you find a zero coupon > bond, > > issued by the gov, with same pv and duration as > > your liability, you will always have some risk > > when performing immunization > > there was a question like that. you can have 0 > immunization risk as the scenario you mentioned > below. > > My question: > > if duration matches and PV matches, do we still > exposed to interest rate risk yes or no? My answer > is no yield curve risk is not an interest rate risk?
YC is not Interest Rate Risk according to CFAI they seperate the two. IR risk is Parrallel shifts while TC is twists