In general, a refinancing position constitutes a new financing position that is taken rolling over the funds that have reached maturity date. More specifically, a refinancing position comes into play when an entity’s asset holding period is longer than its corresponding liability period. For example, an entity holds an asset maturing in 6 months, while its corresponding liabilities have a term of 3 months. In such a situation, an entity would expect to have its financing maturing earlier because its liabilities or a portion of these liabilities mature earlier than its assets.
This situation arises, for example, when a bank mobilizes funds (accepts liabilities) by issuing certificates of deposits (CDs) for a shorter maturity than its assets. The refinancing decision will have to be tackled when such liabilities mature. In reality, the net position would matter: it is figured out by aggregating the maturities and amounts for all assets and liabilities. In this case, the bank would have to protect itself against unaccounted-for increases in financing costs- e.g., by selling futures contracts on T-bills.
The opposite is true in the case of a reinvestment position.
Comments