What is the maturity matching approach?

The maturity-matching approach refers to the strategy where assets are matched with the liabilities of the same maturity. The short-term assets are financed by short-term liabilities and long-term assets are financed by long-term liabilities or equity.

What is maturity match and mismatch?

A maturity mismatch often refers to situations when a company’s short-term liabilities exceed its short-term assets. Maturity mismatches often signify a company’s inefficient use of its assets. Maturity mismatches can also occur when a hedging instrument and the underlying asset’s maturities are misaligned.

What does it mean to adopt a maturity matching approach to financing assets including current assets?

Maturity matching simply means that long term funds should be used to finance long term assets and short term funds should be used to finance short term assets. That means, long terms funds will finance fixed assets and permanent working capital w…

What is the purpose of maturity matching?

Maturity matching or hedging approach is a strategy of working capital financing wherein we finance short term requirements with short-term debts and long-term requirements with long-term debts. The underlying principle is that each asset should be financed with a financial instrument having almost the same maturity.

What is aggressive approach?

A working capital policy is called an aggressive policy if the firm decides to finance a part of the permanent working capital by short term sources. Therefore, the financial manager should try to have a trade-off between the hedging and conservative approach. …

What is double mismatch?

One was the so-called double mismatches, that is, currency mismatches and maturity mismatches, and the other was a bank-centric financial system. Financial institutions in the region were borrowing short-term debt in dollars to finance longer-term lending in domestic currencies.

What is gap or mismatch risk?

The Gap or Mismatch risk can be measured by calculating Gaps over different time intervals as at a given date. Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets (including off-balance sheet positons).

What is the concept of asset/liability management?

Asset/liability management is the process of managing the use of assets and cash flows to reduce the firm’s risk of loss from not paying a liability on time. The asset/liability management process is typically applied to bank loan portfolios and pension plans. It also involves the economic value of equity.

What are the major functions of Alco?

Asset-liability committees (ALCOs) are responsible for overseeing the management of a company or bank’s assets and liabilities. An ALCO at the board or management level provides important management information systems (MIS) and oversight for effectively evaluating on- and off-balance-sheet risk for an institution.

What are the advantages and disadvantages of matching the maturities of assets and liabilities?

An advantage of matching the maturities of short-term assets with short-term liabilities is that extra costs paid on new short-term liabilities will be compensated by extra returns earned on new short-term asset investments because higher short-term interest rates apply to both borrowing and investing.

What are the advantages of matching the maturities of assets and liabilities What are the advantages?

What does it mean to match assets and liabilities?

Companies that take a maturity-matching approach match assets and liabilities that have the same maturity terms. This means that assets balance with liabilities on either a short-term or long-term basis. Using this approach, companies do not fund a short-term asset with a long-term liability, for example.

How does maturity matching work for short term debt?

Maturity Matching. The maturity-matching approach requires that short-term assets be financed by short-term liabilities and long-term assets by long-term liabilities or equity. When a short-term debt matures, the short-term asset it finances also matures and can be used to repay the debt on time.

Is it possible to match maturity of assets?

Exactly matching the maturity of assets with their source of finance is practically not possible. There is quite a lot of uncertainty on the current asset ’s side. One cannot precisely predict at what time, the debtor will pay or what time the sales will occur. Once the credit sales take place, the ball goes in the court of the customer.

What are the disadvantages of maturity matching?

The maturity-matching approach uses a combination of short-term and long-term liabilities and may achieve a lower financing cost on average. Companies that use more short-term liabilities in their asset financing face potential interest-rate risk if there is an increase in short-term interest rates.