Cash Flow Matching for Pension Fund Liabilities

Company XYZ is a large pension fund with projected quarterly liabilities of $10 million for the next ten years. The fund is currently evaluating a cash flow matching strategy to effectively manage its liabilities. The portfolio consists of various fixed income securities, including government bonds, corporate bonds, and municipal bonds. The current yield on the portfolio is 4%, and the average duration of the securities is 5 years.

Discuss the key considerations and steps that the portfolio manager should take in implementing a cash flow matching strategy. Include specifics about the types of securities that may be used, how to structure the cash flows, and any risks associated with this strategy. Furthermore, analyze how changes in interest rates might impact the effectiveness of cash flow matching in meeting the projected liabilities.