DEFINITION of 'Immunization'

A strategy that matches the durations of assets and liabilities thereby minimizing the impact of interest rates on the net worth.

Also known as "multiperiod immunization".

BREAKING DOWN 'Immunization'

For example, large banks must protect their current net worth, whereas pension funds have the obligation of payments after a number of years. These institutions are both concerned about protecting the future value of their portfolios and therefore have the problem of dealing with uncertain future interest rates. By using an immunization technique, large institutions can protect (immunize) their firm from exposure to interest rate fluctuations. A perfect immunization strategy establishes a virtually zero-risk profile in which interest rate movements have no impact on the value of a firm.

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