Hi,
Can someone explain the difference to me ?
Thank you very much.
Frank the Tank Z
Cash flow matching
- Begin with choosing 1st bond with maturity equal to last liability payment date
- Buy enough par value on this bond such that its principal+ interest satisfies your last year liability
- Now start working backwards, choose 2nd bond which satisfies 2nd last year remaining liability (after adjusting for the first bonds coupons amount) & continue untill all liabilities are addressed
Multiple liability - i can think of 3 conditions now- ML is possible if following conditions are satisfied (for paraller shifts only)
- PV of assets = PV of liabilties
- Assets durations = liabilities durations (I guess min requirement to immunize Multi liab.)
- Range of distribution of duration of assets should exceed range of distribution of duration of liabilities (Very imp)
I am sure i will forget this on the ‘D day’ 40 days from now :-/
differences:
Cashflows -
-
Reinvestment assumptions: - depends upon all the cashflows so REINVESTMENt rate are imp (should be conservative) whereas in Multilple liability immu. AVERAGE reinvestment will do
-
In Cash flow matching - cahsflows from a portfolio which are occuring prior to liability date are utlized to meet the obligations & in Multiple immunized - only need to have sufficient value at the time of liability date
CF Matching also requires a higher asset base than ML Immunization.