Cash Flow Matched Portfolio vs Immunized Portfolio

CFA Level III Fixed Income
#1

Hi,

I think that the answer is A, but the answer B is also correct in some situation because a cash flow matched portfolio is easier to construct than an immunized portfolio (Duration matching) depending on the situation.

There is no direct description for this in the textbook.
Please advise.

Thank you in advance.

Compared to an immunized portfolio, a cash flow matched portfolio:

A. Usually is more difficult to construct, but is easier to maintain after it has been constructed.
B. Usually is more expensive to maintain after it has been constructed.
C. Can be easily changed after it has been constructed,

#2

Its B, I think…

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#3

A cash flow matched portfolio generally is easier to construct, particularly for the purposes of the CFA exam. You simply match inflows with outflows. So I would agree the answer is B here. The second part of answer A seems correct, which can draw your attention to it, but the first part of that answer is incorrect.

Cash flow matching typically can be more expensive to maintain, because you must use conservative bond returns as the basis of your cash flow matching, etc.

Immunization strategies require less money to fund liabilities and can be changed/rebalanced so long as durations of the strategy bonds match up correctly to the liabilities. But they do not perfectly immunize your cash flows the same way that a cash flow matching strategy does.

Cheers - good luck - you got this :+1:

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#4

Thank you, Toto_11 and Greybeard_The_Elder.

If my understanding is correct, you don’t need to do anything to maintain in cash flow matching, do you?
It is more expensive when you take an action only when it is needed, but usually it is easier to maintain compared to duration matching, which always need to be maintained.

Is this wrong?

#5

I’m inclined to agree with you, it’s not “as” difficult to maintain after it’s constructed. The only changes would be if your cash flows significantly change. Which can happen. You do not need to constantly rebalance durations etc., though, for cash flow matching.

In my opinion at least, the second part of part A is true and it’s an attempt to draw people to that answer - but the first part of A is incorrect so it cannot be the right answer. Cheers - good luck - you got this :+1:

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