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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

A firm finances its permanent working capital with long-term funds and its seasonal temporary needs with short-term bank borrowings. How is this financing policy described?

This is the matching or hedging approach, because long-term sources fund permanent working capital and short-term sources fund temporary needs, so the financing maturity matches the duration of the asset need. Aggressive and conservative policies depart from this matching.

  1. AAggressive policy
  2. BMatching (hedging) approachCorrect
  3. CConservative policy
  4. DZero working capital policy

Explanation

Under the matching or hedging approach, the maturity of financing is matched to the nature of the asset: long-term funds for permanent needs and short-term funds for temporary needs. An aggressive policy would finance part of permanent needs with short-term funds; a conservative one would use long-term funds even for temporary needs.

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