It is for pension funds with monthly outflows. It seems that a cash flow matching strategies with monthly maturities or cash flows is appropriate. Why would the duration matching strategy be better? There could be no coupons or cash flows allowing to cover monthly cash flows under this strategy. The answer given in the mock exam seems highly subjective.
Are the liabilities of the pension known in timing and in outflow? Or is the pension still growing with current partiicpants? How about does the pension benefit increase with inflation thereby changing the outlay?
Finally, can u find bonds to match your CF exactly? you will find a bond maturing in each month?
125, on the dot
1 more - how much more does it cost vs duration matching