So, here measurement error simply means kind of tracking error which we know in equities. Since, we have Type 1 liability, we know the time and amount of liabilities due and we are doing passive fixed income portfolio management here to hedge those liabilities. So, by measurement error we means now getting the exact cash flow yield or YTM i.e. 4% when we reinvest all the coupons during the tenure of the bonds.
Can you please share a little more of the question discussion.
I’m not able to infer what does it mean in the first line when it says “similar situation”.
Thanks for sharing the full question.
So, here measurement error simply means kind of tracking error which we know in equities. Since, we have Type 1 liability, we know the time and amount of liabilities due and we are doing passive fixed income portfolio management here to hedge those liabilities. So, by measurement error we means now getting the exact cash flow yield or YTM i.e. 4% when we reinvest all the coupons during the tenure of the bonds.