What is immunisation?
Developed by Frank Redington, immunisation is a strategy that ensures changing interest rates do not affect net worth . Also known as multi-period immunisation, the strategy matches the duration of assets and liabilities, so that interest range changes do not impact portfolio value.
Where have you heard about immunisation?
It is common for large firms and institutions to develop a perfect immunisation strategy so that they can guarantee interest rate movements have little influence on their portfolios . Examples of methods include cash flow matching and duration matching.
What you need to know about immunisation.
As well as interest rates, immunisation can be used to protect against other financial risks such as fluctuating exchange rates and stock market risks. When immunisation is not fully complete, the strategy is usually referred to as hedging , whereas when it is complete it's usually called arbitrage . Along with cash-flow matching, immunisation is one of two types of dedicated portfolio strategies and when executed well can provide fantastic returns. However, there are risks involved - for example, calculating and timing future liabilities won't always be accurate.
Find out more about immunisation.
Learn more about other dedicated portfolio strategies by reading our definition of cash-flow matching .