Question

An NPS pension fund has a liability profile highly sensitive to 5 year interest rate changes. The fund manager uses ALM to immunize duration. Suddenly, 5-year bond yields rise by 1.5%, and the duration of assets mismatches liabilities by +0.5 years. What is the most appropriate immediate action?

A Increase bond portfolio duration
B Reduce bond portfolio duration
C Hedge using interest rate swaps to shorten duration
D No action required as liabilities are fixed
E Switch investments to equity
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