Immunization

Question 1

Cash Flow Matching

Answer 1

As before, there is a stream of liabilities to be funded at specified time intervals. To achieve this, a cash flow matching strategy makes use of cash flows from principal and coupon payments on various bonds that are chosen so that the total cash flows exactly match the liability amounts.

Question 2

Reddington Immunization

Answer 2

Meets three conditions

1. PV Assets = PV Liabilities
2. Duration of Assets = Duration of Liabilities
3. Convexity of Assets >= Convexity of Liablilities

To solve use 1 and 2 as a system of equations in two variables.

Question 3

Full Immunization

Answer 3

Same as above, but Condition # 3 needs to be satisfied for all i, not just I nought.