12 Immunisation – Redington and Beyond
Peter McQuire
Remark 12.1 The reader may wish to ensure they are familiar with the material in Chapter 9 before studying this chapter.
12.1 Introduction
In 1952 Frank Redington published an article which proposed a method for designing a bond investment strategy which could remove interest rate risk resulting from small parallel changes in the yield curve. In this chapter we discuss the key points of Redington’s theory and look at various examples. Of equal importance, we also look at potential issues with the theory, and how to deal with these problems in practice.
First, we look at a number of simple scenarios, and construct asset portfolios consisting of one or two zero coupon bonds to demonstrate how Redington theory can be used to ensure that the value of the assets, 
, always exceeds the value of the liabilities, 
, (given that 
at 
) following a parallel change in interest rates.
We proceed by analysing a more realistic situation where the liabilities consist of several future payments and will aim to construct a larger ...
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