Investment matching

Question 1

Pure matching

Answer 1

• Complete matching : there is matching by nature, term and currency
• Involves structuring the flow of income and maturity proceeds from the assets such that
  they coincide with the net liability outgo under all circumstances
• Requires the sensitivity of the timing and amount of both the assets and net liability outgo
  to be
  o Known with certainty and
  o Be identical with respect to all factors
• Complete or pure matching is not always possible

Question 2

Why company may not be able to completely match

Answer 2

Timing of outgo is uncertain
* Amount of outgo is not certain ( term assurance especially since there is a possibility of
provider not paying )
* The term of the liabilities may be too long ( e.g pensions, whole life insurance ) and
* Size of outgo may not be available in securities
* Income from the assets may have to be reinvested at unknown terms in the future ( unless
zero coupon bonds are used )

Question 3

Approximate liability matching - liability hedging

Answer 3

• Assets are chosen in such a way as to perform in a similar way to the liabilities
• It involves hedging ( matching ) against the all of the unpredictable changes in the
  liabilities that arise from unpredictable factors that influence liability values , for examples
  ▪ Interest rates
  ▪ Inflation
  ▪ Mortality experience

Question 4

Approximate liability matching - approximate liability hedging

Answer 4

• Hedging against all possible factors that could affect liabilities is impossible
• Better to hedge against specific values that affect liability values
• Familiar forms of hedging :
  ▪ Matching by currency
  ▪ Considering the real or nominal nature of the liabilities when determining
  assets ( matching by nature )
• These look at specific characteristics of liabilities whereas the liability hedging is
  about looking at assets that perform exactly like the liabilities in all events

Question 5

Approximate liability matching - full liability hedging

Answer 5

• More achievable when looking at unit linked liabilities
• Value of liabilities is implied by value of liabilities