Bridge over ocean
1 November 1982 Financial Analysts Journal Volume 38, Issue 6

Contingent Immunization—Part I: Risk Control Procedures

  1. Martin L. Leibowitz, PhD
  2. Alfred Weinberger

Contingent Immunization is a procedure for the pursuit of active bond management within a framework that provides a minimum return even under adverse experience. This is achieved through a procedural “safety net” based upon the modern techniques of bond immunization. The portfolio remains in an active management mode as long as the portfolio’s asset value places it above this safety net. The portfolio enters the immunization mode only when absolutely necessary to assure a promised minimum return.

Central to the implementation of Contingent Immunization is an effective system for monitoring and risk control. This article details a number of the ideas and the potential problems involved in the development of risk control programs for Contingent Immunization. Part I, in this issue, reviews the basic concept of Contingent Immunization, showing how it fits within a framework encompassing both active management and immunization techniques, and outlines the main ingredients of a risk control process. Part II, to appear in the January/February issue, will identify a series of potential problems that can occur under Contingent Immunization and will point out various ways of mitigating their effects; it will also describe empirical studies that shed light on some of the key assumptions involved in the Contingent Immunization process and examine the rather distinctive character of the risk control process.

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