Liability-Driven

CFA Level III Fixed Income
#1

In the vignette of the question 18-23 they say that the city has multiple liabilities of different amounts and maturities relating to the pension fund, infrastructure repairs, and various other obligations.

However in the strategies 1 and 2, it seems that they take each of the multiple liabilities as a single liability.

I’m just wondering why they don’t use a multiple liabilities strategy as the duration matching (matching the duration of the assets with the duration of the liabilities here). I mean it’s clear that there’s multiple liabilities. That raises the following question, can we take multiples liabilities and assume that the are single liabilities ?

Any help would be appreciated.

Thanks.

#2

Yes, you can break down any cashflow pattern into multiple single liabilities and hedge/immunize them separately. It also states in the vignette:

“Ng observes that the current fixed-income portfolio is structured to match the duration of each liability.”

With a large number of different maturities it will be impractical though since the specific instruments needed won’t be all available in the market or provide a perfect hedge.