An insurance company aims to structure a portfolio of assets and liabilities so that:

1. Its assets and liabilities have equal present values and equal modified durations.
2. 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.

Solution: E

The conditions

1. assets and liabilities have equal present values and equal modified durations, and
2. 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.