Immunization Strategies for Fixed Income in Pension Funds

A pension fund has a liability that requires it to make a payment of $10 million in 10 years. The fund’s current fixed income portfolio has a market value of $7 million, with a duration of 6 years, while the fund aims to achieve an immunization strategy that adequately covers this liability.

Describe the concept of immunization in the context of pension fund liabilities, and explain how the fund could structure its fixed income portfolio to achieve the desired immunization. Be specific in discussing the aspects of duration matching, convexity, and duration targeting in your response.