1. How might mismatches occur? 

Here we are concerned with currency mismatches arising from euro assets or liabilities being redenominated into a new currency. Pre-redenomination, where a business has matching assets and liabilities denominated in euro, movements in exchange rates will not affect the relative values of those assets and liabilities due to their all being denominated in euro. If, however, an asset but not a liability (or vice versa) is redenominated from euro into a new currency, the business is exposed to the risk of exchange rate movement post-redenomination between the two currencies. If, as is widely anticipated, the new currency falls in value against the euro then assets redenominated in the new currency would fall in value as against previously matching liabilities still denominated in euro - a potentially serious business issue. This currency mismatch risk from redenomination may also arise where a hedged asset is re-denominated into the new currency but the cashflows under the hedge contract are not re-denominated (or vice versa).

2. How might hedging assist? 

This currency mismatch risk will be removed if a business is able to operate on the basis that it has matching assets and liabilities which would be redenominated into a new currency in the event of a eurozone exit (and also has matching assets and liabilities which would remain denominated in euro). It may not be practicable fully to achieve this level of matching, but hedging contracts might be entered into generating cashflows in currencies which would remain matched with particular assets or liabilities post-redenomination, so reducing mismatch risk - eg a hedge could be entered into to generate either (1) a cashflow receivable (an asset) which would be redenominated into a new currency upon eurozone exit and which matched an existing liability which would be similarly redenominated upon eurozone exit, or (2) a cashflow obligation (a liability) which would similarly match an existing asset. The currency risk being assumed by counterparties providing this hedging will of course be reflected in hedge pricing and these hedging costs will no doubt affect the level of hedging businesses decide to enter into to protect against currency mismatch risk on redenomination.