November 1998
Intermediate to advanced
220 pages
6h 36m
English
Content preview from Fixed Income and Interest Rate Derivative Analysis
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Chapter 2
Imperfect replication:
immunization and duration
Consider an insurance firm whose liabilities involve payments that the comp-
any can predict quite accurately. The firm needs to invest the premiums it
receives today into a portfolio of assets, so that it can be sure of meeting the
payments, and it wants to do so at as low a cost as possible.
Viewing the future payments as fixed, the ideal strategy would simply
invest the premiums in default-free bonds, with the bonds selected so that
bond cash flows exactly offset the future payments.
For example, say an
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