Fixed Income Question on Cashflow Matching easily, easier, maintain, difficult

Carson

A cash flow matched portfolio:

A: Usually more difficult to construct than an immunized portfolio, but it is easier to maintain after it has been constructed

B: Usually more expensive to maintain than an immunized portfolio after it has been constructed

C: Can be easily changed after it has been constructed

ohai

from reading Stalla, my understanding is that Cash flow matching is more expensive upfront, but easier to maintain.

Immunization costs less upfront, and is more difficult to maintain due to having to rebalance all the time.

I say A.

Where is this question from?

justin88

A- if the cash flow from bond already match the liability, there's no need to rebalance once constructed. hence easier to maintain after construction. the hard part is finding the right bond to match the cashflow of liability.

NakedPuts2011

It should be B

strikethree

Answer please

infinitybenzo

still say A

bboo

I say B. How likely is it that you will cash flow match with nothing but zero-coupons?? Only in this case would the upkeep be less time consuming and expensive.

IMHO the root of this question lay in the "easier to maintain" statement. They are going for the sucker that thinks "match the cash flows and then your done! easy!."

Remember that a match at first is not matching later due to convexity and duration. I say B B B.

mar350

You have to keep rebalancing an immunized portfolio.

justin88

That was my answer originally. B

zwjy

To quote Scheweser notes, "Since it is unlikely that the cash flows from a bond portfolio will exactly match the liabilities, reinvestment risk is inherent in cash flow matching. As such, a minimum-risk immunization approach to funding multiple liabilities is at least equal to cash flow matching, and probably better, since it would be less expensive to fund a given stream of liabilities"

I'm more certain that the answer is B.