This Exam FM sample reference tests Redington Immunization Conditions. Comparing each statement with those conditions shows that statement B is false; the remaining statements describe required conditions or limitations correctly. The result agrees with the published answer key, choice B.
How to solve this Redington Immunization Conditions question
Setup
Setup
Redington immunization at the valuation rate requires equal present values, equal first derivatives or durations, and asset convexity greater than liability convexity.
PVA=PVL,DA=DL,CA>CL
Model
Model
These are local conditions under a flat yield curve and small parallel shifts. They do not eliminate the need to rebalance as time passes or as cash flows change.
flat curve and parallel small shifts are assumed
Compute
Compute
Comparing each statement with those conditions shows that statement B is false; the remaining statements describe required conditions or limitations correctly.
duration drift requires frequent rebalancing
Answer
Answer
The calculation gives the statement identified by the conditions above for redington immunization conditions, matching published choice B.
choice B(B)
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These notes identify the calculation error associated with each wrong letter when that error is reproducible.
AChoice A does not satisfy the checked redington immunization conditions conditions that select published choice B; no distinct standard one-step error is identifiable.
CChoice C does not satisfy the checked redington immunization conditions conditions that select published choice B; no distinct standard one-step error is identifiable.
DChoice D does not satisfy the checked redington immunization conditions conditions that select published choice B; no distinct standard one-step error is identifiable.
EChoice E does not satisfy the checked redington immunization conditions conditions that select published choice B; no distinct standard one-step error is identifiable.
Original practice · fully worked
Original variant: selecting a locally immunized asset portfolio
A liability has present value 100, Macaulay duration 5, and convexity 32 at the valuation yield. Which candidate asset portfolio satisfies the Redington value, duration, and strict convexity conditions at that yield?
A PV 98; duration 5; convexity 35
B PV 100; duration 4.8; convexity 36
C PV 100; duration 5; convexity 35
D PV 100; duration 5; convexity 30
E PV 102; duration 5; convexity 40
Variant answer in brief
Only candidate C matches both 100 and 5 and has convexity 35, which is greater than 32. Candidate C is the locally immunized portfolio.
Setup
Setup
Write the three local Redington requirements before inspecting the candidates: equal value, equal duration, and strictly greater asset convexity.
PVA=PVL=100,DA=DL=5,CA>CL=32
Model
Model
A candidate fails if even one of the three quantities misses its required relation.
test each candidate against all three conditions
Compute
Compute
Only candidate C matches both 100 and 5 and has convexity 35, which is greater than 32.
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