Hello, A little confused in this “Immunization risk” thing For a Single liability… If Duration of the asset is Greater than Duration of liabilities there would be Price Risk if Interest Rates went up. Now, would there still be Immunization Risk? isn’t the rule; reinvestment risk = immunization risk? the readings indicate that Immunization Risk only occurs when there is “Reinvestment Risk”? i.e. Duration of assets LESS than Duration of liabilities (and that rates fall) Can reinvestment risk occur when Duration of Liabilities is Less than Duration of Assets? (I don’t think so…?) My “thinking” is (as in the initial example) even though there is no reinvestment risk…the portfolio is not “technically” Immunized b/c if Interest rates rise, we have price risk (price of assets fall)…therefore, we won’t be able to meet our obligations. What is wrong with my approach, logic confused with? what is the correct terminology, relation? Thanks, a
I just read this part yesterday so maybe I can help: > > isn’t the rule; reinvestment risk = immunization > risk? No. Immunization risk is the risk that you won’t be able to fund the liability (Price risk + Re-investment risk). In practice the main component of the immunization risk is due to re-investment risk. > > the readings indicate that Immunization Risk only > occurs when there is “Reinvestment Risk”? i.e. > Duration of assets LESS than Duration of > liabilities (and that rates fall) this is what Schweser says, but not what the CFAI says. > My “thinking” is (as in the initial example) even > though there is no reinvestment risk…the > portfolio is not “technically” Immunized b/c if > Interest rates rise, we have price risk (price of > assets fall)…therefore, we won’t be able to meet > our obligations. > This is correct. > What is wrong with my approach, logic confused > with? what is the correct terminology, relation? > > Thanks, > a It appears a case of over-reliance on Schweser
thanks mo34 I read this in the multiple liability section, CFAR book 3 page 349, the last 4 lines…I mistook “determines” for “equals”…it makes sense now… it’s really obvious for multiple liabilities, But, now I understand how the word “determines” is appropriate for single liabilities as well! …I have to really be exact with my words Much Appreciated! a
Immunization topic has been my worst nightmare for the last month … i am just not able to understand how things work…i have read that material atleast 5 times … but cant explain a single concept there…
zidane… I found the topic challenging too. I thought I understood it at first, then kept discovering things I didn’t know as well as I thought. Just hope it’s not that way on the exam too. My suggestion… push forward and come back to review it. Stuff may just settle and require some time to digest - it may well be clearer when you come back to it.
whenever I finish the topic i get the feeling that Some thread is missing… but u r right … i will keep trying to learn