What is 'asset-liability matching' in the context of institutional fund management?

Question: What is 'asset-liability matching' in the context of institutional fund management?

Answer options:

• A strategy to always invest in the highest-yielding assets. ✅ A strategy where the duration and cash flows of assets are aligned with those of liabilities to minimize interest rate risk.
• A method of short-term market timing to exploit price discrepancies.
• A requirement to invest only in liquid assets readily available for sale.

Correct answer: A strategy where the duration and cash flows of assets are aligned with those of liabilities to minimize interest rate risk.

Explanation: Asset-liability matching is a key strategy for institutional investors (like pension funds or insurance companies) to manage interest rate risk. It involves structuring the asset portfolio so that its cash flows and duration closely match those of the institution's future liabilities, thereby immunizing the portfolio against interest rate changes.