Hi guys @Jwa @RaviVooda @AjFinance @Alta12
hope your studies been going well, I need your views on this very question.
"In addition to his CIO responsibilities, Choo is also responsible for managing the funding liabilities for a new wing at the local hospital, which is currently fully funded utilising a standard immunization approach with noncallable bonds. However, he is concerned about the various risks associated with the liabilities including interest rate risk, contingent claim risk, and cap risk."
Are Choo's concern regarding various risk of funding the hospital liability correct?
B. No, because interest rat risk is not a factor.
C. No, because contingent claim risk is not a factor.
Answer: A is correct. Cap risk, interest rate risk and contingent claim risk are all risks to the portfolio manager faces.
My answer however is C. Since the immunisation approach with noncallable bonds, doesn't that mean there's no risk of the bonds being called when the interest rates fall, hence there should not be any contingent claim risk (a.k.a. call risk). Please correct my understanding here, thanks.