What is mismatch risk?
Mismatch risk is where the risk you've chosen for your investments is not suitable for your circumstances or goals. An example would be if you were looking to retire in the short term, but you put your savings into high-risk long-term investments.
Where have you heard about mismatch risk?
You may have heard about mismatch risk during the financial crisis, where many people were offered mortgages that they couldn't afford to pay back.
What you need to know about mismatch risk...
Poor financial planning causes mismatch risk. But it's not only investors who can fall foul of mismatch risk, banks can also suffer. For example, if a bank that mainly offers short-term deposits invests in long-term mortgages, its outflow may outweigh its cash inflow.
Mismatch risk can also occur in futures markets where a swap dealer is unable to find the right buyer for a swap transaction.