Objective of Duration Matching in Liability-Driven Strategies

Very Easy Liability-driven Strategies Duration Matching

A fixed-income portfolio manager is assessing the duration of the liabilities associated with a pension fund. To manage this fund effectively and minimize the potential interest rate risk, the manager aims to implement a duration matching strategy. Duration matching involves aligning the interest rate sensitivity (duration) of the assets with the duration of the expected future cash flows from liabilities.

Which of the following options best describes the primary objective of duration matching in this context?

To ensure that the cash flows from the assets will exactly cover the cash flows from the liabilities.

To minimize the interest rate risk associated with the pension fund.

To maximize the yield on the fixed-income portfolio.

Hint

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