Symmetric Cash Matching

Abstract

Managers who are faced with the task of funding a liability stream may choose from several alternative strategies when structuring the funding portfolio. The overall objective is to find a low-cost, low-risk method for funding the liabilities. Two popular strategies are cash matching and immunization. The cash-matching strategy is a low-risk strategy that utilizes cash flows on or before a liability date to meet each liability. The immunization strategy, which matches the duration of the assets to the duration of the liabilities, often requires a lower initial cost for construction of the portfolio. Under immunization, however, the portfolio must be rebalanced over the funding horizon, and this can lead to substantial costs. The symmetric cash-matching strategy is a low-risk alternative that can be used to fund a liability stream, often at a lower cost than either the cash-matching or immunization strategy. By allowing the use of cash flows occurring both before and beyond a liability date, it offers greater flexibility in portfolio construction. Risk is minimal, because all borrowings are fully backed by expected cash inflows to the asset portfolio, to be received just beyond the liability date. Furthermore, by construction, changes in borrowing and lending rates will have offsetting impacts on the portfolio. Thus the funding portfolio may be subject to lower volatility. For these reasons, symmetric cash matching is a reliable, low-risk and often less costly alternative to other popular strategies used to fund liabilities.