maturity mismatching

maturity mismatching is one of the easiest and simplest way for financial institutions to remove the risk of changes in the interest rate between now and some future time.It is carried out by acquiring two or more financial contracts whose maturities overlap.For example,suppose that fund manager know that her company will receive $100000 in three months and needs to hold those funds for dollar payment of financial obligation six months from now .Being concerned that the interest rate may fall prior to the receipt of the funds ,the fund manager looks for way to lock in the current deposit rate for the three-month period during which the $100000 cash surplus will be held .she accomplishes this by borrowing $100000 for three months and investing it in a fixed-rate instrument for six months,which will mature Just at the time it is needed for the future expected payment .when the $100000 is received at the end of three months ,it is then used to pay back the initial three-month loan when it comes due,while the invested funds continue to earn a known fixed amount of interest until they are needed six months from now. this could be accomplished by borrowing the needed funds today for an eight-month period ,placing the funds in a short-term fixed-rate deposit for two months ,and at the end of two months using the funds to pay the anticipated financial commitment.Again ,by overlapping the maturities of two financial instrument ,the future lending rate is secured at Known interest rate ,and the cost of the hedge is the difference between the two-month deposit rate and the eight-month loan rate for the two-month overlap.