Distinguish between individual asset/liability hedging and maturity-range hedging?
Distinguish between individual asset/liability hedging and maturity-range hedging? What type of company can do each?
Individual asset/liability hedging, involves matching the maturities of specific assets with specific liabilities. Each liability is offset with an asset of equal amount and maturity. While this strategy achieves the maximum risk reduction from hedging, it is costly, difficult, and time-consuming to do. With maturity-range hedging, assets and liabilities are grouped by maturity and the groups are kept roughly equal in size. This policy is far less costly and more doable than attempting to match every asset and liability. Effectively, maturity-range hedging is an attempt to back off from individual asset/liability hedging to find a practical balance sheet hedging policy.