Contingent immunization (CI)

Contingent immunization (CI) is a hybrid active/passive strategy used in the context of liability-driven and index-based strategies for fixed income. Implementing contingent immunization requires a significant surplus (assets versus liabilities).

Contingent Immunization

On this page, we discuss different ways in which contingent immunization can be applied and how the approach can be vulnerable to liquidity risk.

Contingent immunization approaches

As long as the surplus of assets over liabilities is of sufficient size, the portfolio to meet liabilities can be actively managed. At the extreme, assets could be invested in equity, commodities, real estate, or any other assets. If the assets earn more than the initially available immunization rate, the surplus will grow, and can eventually be returned to the investor. If the strategy is unsuccessful, the surplus will shrink, and the portfolio must be immunized before the surplus declines below zero.

Thus, the following set of approaches can be followed:

  • Invest the entire portfolio in stocks
  • Invest only the surplus in stocks. Use the balance of the assets to construct an immunized portfolio. Only the surplus is at risk of loss
  • Use active bond management techniques when managing a portfolio of fixed income securities by not hedging a 100%
    • underhedge if investor believes interest rates will decrease
    • overhedge if the investor believes interest rates will increase

Contingent immunization liquidity risk

CI approaches can be vulnerable to liquidity risk:

  • If all of the assets (instead of just the surplus) are actively managed and the surplus declines, the assets must be quickly liquidated without further loss and converted to an immunizing portfolio before the surplus becomes negative
  • Even if only the surplus is actively managed, liquidity issues can still be a problem. For example, in the case of short options contracts, the downside risk is unlimited. Similarly, the potential losses on futures contracts are very large and could exceed the portfolio surplus.


We discussed contingent immunization, a liability-driven investment strategy that is used when immunizing a portfolio of multiple liabilities in an active way. In particular, as long as there is a surplus, the portfolio is managed actively.