Questions about dispersions of CF around liabilities

[Mosstastic]

Can someone help me figure out the logic with the following.
I understand that when attempting to limit immunization risk that we prefer asset maturities around the horizon date to minimize immunization risk.
I know I’ve read somewhere that there are also instances where we want our maturities to mature before and/or after our liabilities to ensure were limiting some type of risk…. I simply can’t remember. It’s also possible it’s not even related to immunization.
Any my idea what I’m talking about with regards to the latter?

 

[MrSmart]

It limits interest rate and cash flow risk, because if durations change, then you don’t need to rebalance as often or as much.

 

[Mosstastic]

So the assets engulfing the liabilities helps protect against cash flow and market value risk, but if they’re huddled around the horizon were reducing immunization risk?

 

[MrSmart]

Exactly.

 

[clearlycanadian]

It’s with regard to reinvestment risk. If you have bonds maturing earlier than the horizon, you will need to reinvest the proceeds in order to maintain the value of assets equal to the PV of liabilities. If rates change during that period, you run the risk of rates moving against you.

 

[cokemicho]

Mosstastic wrote:
Can someone help me figure out the logic with the following.
I understand that when attempting to limit immunization risk that we prefer asset maturities around the horizon date to minimize immunization risk.
I know I’ve read somewhere that there are also instances where we want our maturities to mature before and/or after our liabilities to ensure were limiting some type of risk…. I simply can’t remember. It’s also possible it’s not even related to immunization.
Any my idea what I’m talking about with regards to the latter?

yes, you are talking about reinvestment risk, which you will face if interest rates goes down. The other possibility is that you have higher duration and then youll face market risk (if interest rares goes up)