What does successful duration matching protect against?

Successful duration matching primarily aims to protect against interest rate fluctuations. Duration is a measure of the sensitivity of a bond's price to changes in interest rates. When a portfolio's assets and liabilities are duration matched, it ensures that the interest rate risk for both sides is aligned. This means that if interest rates rise or fall, the changes in the present value of liabilities are offset by changes in the present value of assets, reducing the impact of interest rate movements.

While the option of parallel shifts in the yield curve seems closely related, it is important to clarify that duration matching protects against general interest rate movements rather than specifically targeting the parallel shifts aspect. Duration can mitigate the effects of interest rate changes, which may include shifts in the yield curve, twisting, and other non-parallel movements, but its fundamental focus is on the overall fluctuations in interest rates.

The other options address aspects that are not directly mitigated by duration matching. Inflation risks are related to the purchasing power of money over time, which is not influenced directly by matching durations. Specific asset class failures are related to credit or market risks, which duration matching does not address. Therefore, successful duration matching serves as a strategy to manage the inherent price sensitivity related to interest rate changes in a systematic manner