Cash flow matching is a process of hedging in which a company or other entity matches its cash outflows (i.e., financial obligations) with its cash inflows over a given time horizon.[1] It is a subset of immunization strategies in finance.[2] Cash flow matching is of particular importance to defined benefit pension plans.[3]
It is possible to solve the simple cash flow matching problem using linear programming.[4] Suppose that we have a choice of j = 1 , . . . , n {\displaystyle j=1,...,n} bonds with which to receive cash flows over t = 1 , . . . , T {\displaystyle t=1,...,T} time periods in order to cover liabilities L 1 , . . . , L T {\displaystyle L_{1},...,L_{T}} for each time period. The j {\displaystyle j} th bond in time period t {\displaystyle t} is assumed to have known cash flows F t j {\displaystyle F_{tj}} and initial price p j {\displaystyle p_{j}} . It possible to buy x j {\displaystyle x_{j}} bonds and to run a surplus s t {\displaystyle s_{t}} in a given time period, both of which must be non-negative, and leads to the set of constraints:
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