In their first face-to-face meeting, Ruelas gathers a group of his employees and asks Maestre to explain the methods Cávado uses to manage interest rate risk. Maestre starts by discussing the nature of pension fund management. She tells the group, “With a defined-benefit pension fund, the assets are structured to match the expected cash outflows required to meet the liabilities, making it a form of liability-driven investing (LDI). Pension funds can be difficult to manage, because neither the timing nor the amount of the liabilities is known in advance with certainty. With LDI, interest rate risk management efforts focus on changes in the values of the assets because the liabilities, while uncertain, aren’t affected by changes in interest rates.”
Q. Is Maestre’s description of pension fund management as a form of LDI most likely correct?
- Yes.
- No, she is incorrect regarding the focus of interest rate risk management.
- No, she is incorrect regarding the difficulty of managing pension funds.
