CFA Level 3 | Fixed Income: Contingent Immunization

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CFA Level 3
Topic: Fixed Income Portfolio Management
Reading: Liability-Driven and Index-Based Strategies

The contingent immunization strategy can be pursued when the market value of the asset portfolio exceeds the present value of liabilities (i.e. surplus).

The fund manager can structure the portfolio based on their view on interest rates. Derivative contracts like futures can be used to alter the BPV of the portfolio to meet the objective (e.g. close duration gap, or profit from manager's view).

If the manager believes that interest rates will fall, then they will position the portfolio such that the BPV of the portfolio exceeds the BPV of the liabilities.

If the manager believes that interest rates will rise, then they will position the portfolio such that the BPV of the portfolio is less than the BPV of the liabilities.

Over-hedging is a term that is used to refer to the manager buying or selling MORE futures contract than what is needed to close the duration gap.

Under-hedging is a term that is used to refer to the manager buying or selling LESS futures contract than what is needed to close the duration gap.

00:00 Example 1 (Overhedging)
07:04 Example 2 (Underhedging)

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Видео CFA Level 3 | Fixed Income: Contingent Immunization канала Fabian Moa, CFA, FRM