hypothetical immunization q therefore, decrease, increase, interest, assets

AnalystForum

Duration of Assets = 5
Duration of Liabilities = 4
Let’s say you think interest rates will increase.  You are subject to price risk and therefore want to decrease the duration of your assets.  Got that.
But what if you think interest rates will decrease.  Would you:
a) still decrease the duration of your assets (to have less sensitivity to the decreasing rates, even though the decreasing rates are a good thing for you in this case)
b) increase the duration of your assets (to have even more sensitivty to the decreasing rates, which increase MV assets more than they increase MV liabilities)
c) do nothing

kd26gioi

increase duration so that asset will increase more than liability.

firat

im not sure - i think itll depend on the IPS. If the mandate states to match your laibilities, you probably shouldnt be speculating on changing rates, rather you should match your liabilities to fully fund them. IMO.

BelalM

Spanishesk wrote:
im not sure - i think itll depend on the IPS. If the mandate states to match your laibilities, you probably shouldnt be speculating on changing rates, rather you should match your liabilities to fully fund them. IMO.
yea i think that last part is key.  i think you would probably do nothing because if you increase your duration that is more speculating than hedging.

thecfawannabe

Should depend on the objective. Suppose if its a Pension plan DUR a  DUR l……if int rate are expected to decrease & your objective is to increase the surplus (if its in surplus region), you would be looking to increase the duration of assets to capture more increase in assets than liabilities increasing surplus.