Asset-Liability Matching Law and Legal Definition
Asset-Liability Matching is the process of investing, purchasing, selling and otherwise adjusting a company's asset holdings so that cash is available when it is needed to cover the company's liabilities.
When the duration of the portfolio of assets and the portfolio of liabilities is equivalent, changes in interest rates should have a negligible effect on the structure: the portfolio is said to be duration matched. This is a prime example of the benefit of Asset-Liability Matching (ALM). Although, there are risks other than changing interest rates. Furthermore, duration itself is not static, and portfolio rebalancing must be dynamic to account for such changes. However, in principle, this form of ALM can work to help investment managers put some control on at least one form of risk in our ever-more complex investment world.
