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A large multinational business wishes to manage its currency risk. It has been suggested
that:
1. Matching receipts and payments can be used to manage translation risk.
2. Matching assets and liabilities can be used to manage economic risk.
Which ONE of the following combinations (true/false) concerning the above statements
is correct?Answer 1 is false and statement 2 is true.
Matching assets and liabilities can be used to manage economic risk because it helps to align the maturity of a company’s liabilities with the expected duration of its assets. By matching the timing of cash inflows from assets with the timing of cash outflows from liabilities, a company can reduce the risk of a liquidity mismatch and ensure that it has enough funds to meet its obligations. For example, if a company has long-term assets, it can fund them with long-term liabilities to avoid a liquidity crisis. This approach helps to mitigate the risk of being unable to generate sufficient cash to repay debts as they become due.
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