Duration Matching in Liability-Driven Investment Strategy

ABC Corporation is a mid-sized company that has recently engaged in a long-term financing strategy to support its pension fund obligations. The company is looking to implement a liability-driven investment strategy aimed at matching the duration of its pension liabilities with fixed income investments.

The pension fund has projected cash outflows of $10 million per year for the next 10 years, following which the liability will be settled with a $50 million payout. The pension liabilities are estimated to have a duration of 7 years.

Discuss the concept of duration matching and its importance in the context of liability-driven investment strategies. In your answer, explain how ABC Corporation can structure its fixed-income portfolio to achieve duration matching with its pension liabilities. Include any relevant considerations and potential risks that might arise in this strategy.