Immunization Strategy for Pension Liabilities

John Smith is the Chief Financial Officer (CFO) of XYZ Corporation, which has a pension obligation of $10 million due in 10 years. The company is assessing its current investment strategy and considering the implementation of an immunization strategy to ensure that it will meet its future liability. Currently, XYZ Corporation has a fixed income portfolio worth $9 million, with a modified duration of 4 years.

The CFO has gathered the following information: the yield curve is upward sloping, the current interest rate for 10-year bonds is 3%, and the average duration of high-quality bonds in their portfolio is below the duration of the liability.

Discuss how immunization works as a liability-driven investment strategy, and outline the steps John should take to create an immunized portfolio to meet the pension obligation. Include considerations for duration matching and the potential impact of interest rate changes on the strategy.