A company owes 1000 one year from now and 1000 two years from now. Which of the following demonstrates a strategy to use exact cash-flow matching between assets and liabilities?

• The company purchases a one-year zero-coupon bond and a two-year zero-coupon bond, each with a face amount of 1000.
• The company deposits 1859.41 into an account that currently earns an annual effective interest rate of 5% that is subject to change in one year.
• The company purchases an asset that has the same duration as the liabilities and a larger convexity.

• I only
• II only
• III only
• I, II, and III
• The correct answer is not given by (A), (B), (C) or (D).

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

Solution: A

I provides cash flows that exactly matches the liabilities. II only has PV(A) = PV(B), which is not sufficient for exact matching. III describes Reddington immunization, not exact matching.

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.