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Liability Driven Investment

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Abstract

 

Ultimately if an investor had no liabilities or other similar requirement to build up an asset pool there would be no need for investment management. This is the key observation underlying the trend towards liability driven investment (‘LDI’). In essence, LDI involves understanding the nature of the investor’s liabilities and designing an appropriate investment strategy to suit these liabilities. Usually, investors seek a balance between risk and reward, so this does not necessarily result in adopting an investment strategy with economic sensitivities that closely match the sensitivities inherent in the liabilities. Instead, investors may deliberately seek to mis-match relative to their liabilities, because they expect to achieve higher returns by doing so.

 

The aim of these pages is to explore this topic further. They are based in part on material in an Appendix to Kemp (2005).

 

Contents

 

1.       Introduction

2.       The ‘core’ element of such a structure

3.       The swaps element of such a structure

4.       Mitigating credit risk within swap contracts using collateralisation

5.       Monitoring such a structure

6.       Alternative approaches

7.       Other comments

 

References

 


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