What is the requirement for duration matching of liabilities?

For effective duration matching of liabilities, the requirement that the present value of assets should equal the present value of liabilities is fundamental. This principle ensures that the cash flows from the assets are sufficient to cover the cash flows required by the liabilities.

When the present values are equal, it indicates that the organization has transparently aligned its cash flow to meet its obligations as they come due. This alignment helps manage interest rate risk and liquidity risk, as fluctuations in interest rates will impact both sides of the balance sheet in a way that keeps the funding available to meet liabilities.

In contrast, if the present value of assets does not match the present value of liabilities, the organization runs the risk of not being able to meet future obligations, especially if there is a decline in asset values or changes in interest rates that may impact cash flows. This requirement is fundamentally important for financial stability and compliance with fiduciary duties in portfolio management.