Multiple immunization

CFA Level III Fixed Income
#1

I am finding it difficult understanding why portfolio 2 is the best portfolio to be recommended for the question below. Can any one help.

"Chaopraya estimates the present value of the four future cash flows as $230,372, with a money duration of $2,609,700 and convexity of 135.142. She considers three possible portfolios to immunize the future payments, as presented in Exhibit 2.

Exhibit 2

Data for Bond Portfolios to Immunize Four Annual Contributions

Portfolio 1: MV= $245,178, Cash flow yield= 2.521% , Money duration=2,609,981.00, Convexity= 147.640

Portfolio 2 MV=$248,230 Cash flow yield=2.520%Money duration= 2,609,442.00, Convexity=139.851

Portfolio 3 MV=$251,337, Cash flow yield=2.516% Money duration=2,609,707.00, Convexity= 132.865"

Determine the most appropriate immunization portfolio in Exhibit 2. Justify your decision.

#2

The criteria are:

  • MV of assets ≥ PV of liabilities
  • Money duration of assets ≈ Money duration of liabilities
  • Convexity of assets ≥ Convexity of liabilities, with lower convexity better than higher convexity
#3

Thanks @S2000magician.
So my confusion lies on the money duration bit. The money duration for portfolio 2 ( 2,609,442.00 ) is lower than that of the liability (2,609,700.00). Does it mean that the difference is not material enough?

#4

Exactly.

Lower or higher isn’t the issue.

Close is the issue.

It’s less than a 1-bp difference. That’s really, really close.

1 Like
#5

Thank you so much

#6

My pleasure.