Cash flow matching is a procedure of hedging in which a company or other entity matches its cash outflows with cash inflows. Similarly, it is a strategy of investment used by investors or companies in order to meet the future cash needs.
Explanation of Cash Flow Matching
It is the practice of matching returns on a portfolio for future outlays of capital. Cash flow matching is consisting of investment in a certain securities with certain expected returns, so the company or investor will be able to manage the future liabilities. Matching the investment with future liabilities for getting enough return to maintain the portfolio is very important for any company or investor. Cash flow matching is often used in the pension fund management because there is a stream of future liabilities and adequate cash is required to keep the pensions funded. It is also called portfolio dedication. Cash flow matching can provide effective returns if the strategy is executed well. It requires the calculation regarding future liabilities and returns, which is not an easy task and there is always a certain type of risk involved.