What is a portfolio immunization?
Table of Contents
What is a portfolio immunization?
Portfolio Immunization is a strategy that is used to manage your portfolio with a financial goal. This goal can be determined with your investment to a specific amount or at a certain point. Further, this strategy is used to fund a future liability. Immunization is one of two kinds of dedicated portfolio strategies.
How do you immunize your portfolio?
Key Takeaways
- Immunization is a risk-mitigation strategy that matches asset and liability duration so portfolio values are protected against interest rate changes.
- Immunization can be accomplished by cash flow matching, duration matching, convexity matching, and trading forwards, futures, and options on bonds.
What does portfolio diversification and portfolio immunization mean?
Portfolio diversification is the process of investing your money in different asset classes and securities in order to minimize the overall risk of the portfolio. Just imagine what would happen if you invested all your money in a single security. Everything would be great as long as the stock’s performance is good.
What is a matching portfolio?
“Matching” portfolios is a technique for generating a reasonable benchmark for determining the relative performance of a specific equity portfolio and is based on the work in Ho et al. (2005a). Consider the simplest case of a long-only mutual fund that has returned 10% in the last year.
How does cash flow matching work?
Cash flow matching is a process of hedging in which a company or other entity matches its cash outflows (i.e., financial obligations) with its cash inflows over a given time horizon. It is a subset of immunization strategies in finance. Cash flow matching is of particular importance to defined benefit pension plans.
Which has less risk immunization or cash flow matching explain briefly why?
In this respect, a multiple liability immunization strategy is generally superior to cash flow matching. However, in specific cases where the liability amounts and cash flows can be reasonably matched over the time horizon without much reinvestment risk, a cash flow matching strategy may be favored for its simplicity.
What is the difference between bond immunization and cash flow matching?
In cash flow matching, cash flows must be available before a liability is due, whereas, in multiple immunizations, liabilities are funded from cash flows derived from portfolio rebalancing on the basis of dollar durations.
Who uses cash flow matching?
Cash-flow matching is one of two kinds of structured portfolio strategies (the other is immunization), and it is intended for investors who need to fund a series of future expenses. The immunization strategy is generally for investors who need to fund one lump-sum future liability or expense.
What is the idea behind cash flow matching?
A cash flow matching strategy seeks to generate predictable income and principal cash flows with limited portfolio turnover. In effect, a cash flow matching portfolio will adopt a “buy and maintain” approach adhering to a pre- defined cash flow schedule, rather than a less-constrained active approach.
