ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Financial companies can benefit from maturity mismatches when they borrow from short-term depositors and lend long-term at higher interest rates as this should lead to higher profit margins.

Detailed explanation-2: -When maturities of liabilities and assets are mismatched and risk incurred by financial intermediaries then this risk is classified as interest rate risk.

Detailed explanation-3: -Interest Rate Risk : the risk incurred by an FI when the maturities of its assets and liabilities are mismatched and interest rates are volatile. Market Risk : the risk incurred in tarading assets and liabilities due to changes in interest rates, exchange rates, and other asset prices.

Detailed explanation-4: -For companies, a mismatch between assets and liabilities may produce cash flow that does not match with liabilities. One example might be when an asset generates semi-annual payments, but the company must pay rent, utilities, and suppliers on a monthly basis.