Worked solution · Exam FM
This Exam FM sample reference tests Cash-Flow and Risk Matching. Strategy I reproduces both liability amounts at their exact dates; II only matches current value under a rate that may change, and III is Redington immunization rather than exact matching, so choice A.
Independent solution
Setup
Exact matching requires each asset payment to equal the corresponding liability on the same date.
Model
The two zeros in strategy I do exactly that.
Compute
A deposit subject to repricing after one year does not lock both payments, while matching duration and convexity is an immunization strategy rather than cash-flow identity.
Answer
Only strategy I qualifies, which is choice A.
Test the method on unseen problems
30 original general cash flows, portfolios, and asset liability management problems with complete solutions and wrong-choice analysis. Written for Exam FM, not copied from the SOA set. One-time $19 PDF.
Error diagnosis
These notes identify the calculation error associated with each wrong letter when that error is reproducible.
Original practice · fully worked
A restoration project owes 700 after one year and 900 after three years. Plan R buys zeros maturing for exactly those amounts on those dates. Plan S buys one security with equal present value and duration but different payment dates. Which plan is guaranteed to be an exact match?
R reproduces both dated obligations; value and duration do not force S's cash-flow vector, so choice A.
Setup
Write exact matching as equality of the full dated cash-flow vector.
Model
Plan R meets that definition directly at both liability dates.
Compute
Plan S matches two summary measures, but many distinct cash-flow streams share those measures.
Answer
Only R is guaranteed exact, so choice A is correct.
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These references share syllabus concepts or sit nearby in the official sequence. All 117 Exam FM general cash flows, portfolios, and asset liability management practice problems.
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