Immunization

[linhmanhho]

Can anyone help me with recap on Managing funds against liability? for example
What is the difference between immunization and cash flow matching? advantages and disadvantages of each?
Within Immuniztion, which is the difference between single period Immunization, multiple liability immuniztion, immunization for general cash flows?
I total get lost with all of these and really need you help!
Thank you so much!

 

[tozerrt]

*grabs popcorn*
Not sure how much feedback you’ll get here. In essence, you’re asking for a summary of the lion’s share of a chapter. Would probably be better to google it or review some condensed notes for a quick overview.

 

[scatterbrain]

Check page 24 book 4
Immunization - Single Period, Multi period, Immunization for General Cashflows
Cash flow matching - symmetic cash flow matching, horizon matching
Best go through the book for summary of each

 

[g3r41d]

linhmanhho wrote:
Can anyone help me with recap on Managing funds against liability? for example
What is the difference between immunization and cash flow matching? advantages and disadvantages of each?
Within Immuniztion, which is the difference between single period Immunization, multiple liability immuniztion, immunization for general cash flows?
I total get lost with all of these and really need you help!
Thank you so much!

1) Classical Immunization
- Match PV of asset and liability
- Match duration of asset and liability
2) Multiple Liabilities Immunization
- Match PV of asset and liability
- Match duration of asset and liability
- Range of duration of assets is wider than range of liabilities
3) Cashflow Matching
- If you know the amount and date of cashflow
- Work backwards using bullets starting from oldest maturity liability to nearest.
- Incrementally add bullets until satisfying all required cashflows
Classical and multiple liabilities immunization works on the principal of one time parallel interest rates shifts (which seldom happens in real life). Cash flow matching is able to deal with twists and shifts as long as you can exactly match the cashflow. However cash flow matching is more costly.