Asset Liability mismatch:The Financial Concept

February 5, 2010

In financial terminologies, an asset and a liability are two contrasting things. They have opposite property. Normally, assets and liabilities are matched to ascertain financial condition or financial status of companies or individuals for various reasons. When the financial terms pertaining to one condition do not properly match or more appropriately correspond to the financial terms of the other condition, then an asset liability mismatch is said to have occurred. Here the financial conditions in the subject are the asset and the liability. A mismatch can have varieties in it. As such there are different mismatch conditions between the asset and a liability.

An asset liability mismatch can occur in different fields in the subject of finance. For instance there could be a currency mismatch when the transactions of borrowing and lending are performed entirely in two different currencies. The mismatch is generally due to the inherent value differences existing for these two currencies in the forex market. One could derive profits from such mismatches at times when the mismatch leads to surplus amounts after the transaction with the trader and does not go into the trade as such. Similarly losses are incurred in asst liability mismatch when the value remaining is less than the invested one.

A maturity mismatch in asset liability mismatch occurs in cases when a bank has more number of long term assets and short term liabilities. One may not find the information related to an asset liability mismatch in a balance sheet pertaining to the company or bank of the subject.

Tag : Liability, Mismatch, Balance sheet, Maturity,
Main Tag : Asset

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