Explanation:
According to the principles of Redington immunization, a portfolio is immunized against small interest rate changes if the present value of assets equals the present value of liabilities and the net duration is zero.
To immunize a portfolio against large parallel shifts in the zero curve, the net convexity must be positive (i.e., convexity of assets should be greater than the convexity of liabilities). Therefore, choosing a portfolio with a net duration of 0 and a positive net convexity (such as 1) fulfills these conditions.
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Q.46 An investor can immunize their portfolio against large parallel shifts in the zero curve by:
A
Choosing a portfolio of assets and liabilities with a net duration of 1, and net convexity of 0.
B
Choosing a portfolio of assets and liabilities with a net duration of 0, and net convexity of 1.
C
Choosing a portfolio of assets and liabilities with a net duration of 0, and net convexity of 0.
D
Choosing a portfolio of assets and liabilities with a net duration of 1, and net convexity of 1.
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