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Nov 20'23
Exercise
An insurance company aims to structure a portfolio of assets and liabilities so that:
- Its assets and liabilities have equal present values and equal modified durations.
- The convexity of its assets exceeds the convexity of its liabilities.
Determine which term precisely describes the company’s position.
- Diversified
- Fully immunized
- Fully leveraged
- Exactly matched
- Redington immunized
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
Nov 20'23
Solution: E
The conditions
- assets and liabilities have equal present values and equal modified durations, and
- the convexity of its assets exceeds the convexity of its liabilities are precisely what is required for Redington immunization.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.