| Abstract: | The problem of characterizing the least expensive bond portfolio that enables one to meet his/her liability to pay C dollars
K years from now is dealt with in this article. Bond prices are allowed to be either overpriced or underpriced at the purchase
time, while at the sale time the bonds are suppose to be fairly priced. Assuming shifts in spot rates to occur instantly after
the acquisition of a bond portfolio Z and to follow fairly general type of behavior described by the condition (2), we give
both necessary and sufficient conditions for Z to solve the immunization problem above. Our model is general enough to cover
situations with twists in the yield curve. Making use of the K-T conditions, we explain in remark 7 why we focus on search
of an optimal portfolio in the class of barbell strategies. Finally, by means of the K-T conditions we find an optimal bond
portfolio which solves the immunization problem.
This revised version was published online in June 2006 with corrections to the Cover Date. |
