Immunization

Study guides: Exam FM-2, Exam ILA-101, Exam INV-101

Immunization is a Portfolio management strategy that protects the value of a surplus (assets minus liabilities) against adverse interest rate movements. The two main types are:

Redington Immunization: protects against small parallel yield shifts; requires three conditions
Full Immunization: protects against any single interest rate shift (up or down)

Redington Immunization conditions (at current yield $i$ ):

$PV(assets) = PV(liabilities)$
$D_{Mac}(assets) = D_{Mac}(liabilities)$ (Duration Matching)
$C_{assets} > C_{liabilities}$ (Convexity of assets exceeds liabilities)

Verifying Redington Immunization Assets: $PV = 10000$ , $D_{Mac} = 5$ , convexity $= 30$ . Liabilities: $PV = 10000$ , $D_{Mac} = 5$ , convexity $= 25$ . Is Redington immunization achieved?

Answer Condition 1: $PV_A = PV_L = 10000$ Condition 2: $D_{Mac,A} = D_{Mac,L} = 5$ Condition 3: $C_A = 30 > C_L = 25$ All three conditions are met — Redington immunization is achieved.