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Explain the concept of immunization and give a full example. Show All Work.

Explain the concept of immunization and give a full example. Show All Work.

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Immunization in simple words mean protecting the value of portfolio against the change in interest rates. Various strategies are there for interest rate immunization such as duration , volatility and convexity matching. In simpler terms a large banks formulate various immunization strategies to combat the changes in interest rates , such that their portfolio values remains unchanged in unforeseen circumstances. For example, if an investor wants to pay $10,000 in 5 years time, he/she can buy a $10,000 security which guarantees him an inflow of the same amount in 5 years . By purchasing this bond, the investor matches the inflow nd outflowof funds without any fear of change in interest rates.

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