Cashflow matching

Overview

Cash flow matching is a process of hedging in which a company or other entity matches its cash outflows (i.e., financial obligations) with its cash inflows over a given time horizon. It is a subset of immunization strategies in finance. Cash flow matching is of particular importance to defined benefit pension plans.

Solution with linear programming

It is possible to solve the simple cash flow matching problem using linear programming. Suppose that we have a choice of

j = 1 , . . . , n

{\displaystyle j=1,...,n}

bonds with which to receive cash flows over

t = 1 , . . . , T

{\displaystyle t=1,...,T}

time periods in order to cover liabilities

L

1

, . . . ,

L

T

{\displaystyle L_{1},...,L_{T}}

for each time period. The

j

{\displaystyle j}

th bond in time period

t

{\displaystyle t}

is assumed to have known cash flows

See also

Debt sculpting – Specialized financial modelPages displaying short descriptions of redirect targets Duration gap – Financial institutions duration gap Dedicated portfolio theory – Investment strategy matching asset cashflows to future liabilities Fannie Mae – Government-backed financial services company Immunization (finance) – Strategy to minimize effects of changes in interest rates Financial risk management § Investment management Laddering – Investment strategy using staggered-maturity financial instruments Liability-driven investment strategy – Investment management approach Maturity transformation – Practice of funding long-term assets with short-term liabilities