We just learned about cash-matching through dedicated portfolios (using risk free bonds) in my class that concerned mathematical programming. However, in an aside one of the notes said:
It should be noted, however, that dedicated portfolios cost typically from 3% to 7% more in dollars terms than do “immunized” portfolios that are constructed based on matching present value, duration, and convexity of the assets and liabilities. "
When would dedicated portfolios be better than 'immunized' portfolios, where you would have to manage accordingly? Immunized portfolios are dependent on duration, convexity, and present value of cash flows. The book says,
"Portfolios that are constructed by matching these three factors are immunized against parallel shifts in the yield curve, but there may still be a great deal of exposure and vulnerability to other types of shifts, and they need to be actively managed, which can be costly. By contrast, dedicated portfolios do not need to be managed after they are constructed."
What are these other variables? Also, you might have access to more instruments (possibly)? But other than that, I'm not sure when to use dedicated portfolios or just calculate how to immunize the portfolio. Anyone have insight on this?