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Nov 27, 2014 · Liquidity risk is one of the major risks faced by financial entities (such as banks, insurance companies and pension funds) and one of the primary causes of the 2008 financial crisis. Yet many ...
- Jonathan Jacob
Apr 26, 2022 · To measure liquidity risk in your plan, it’s helpful to start by reviewing your cash and collateral obligations. You can use a balance sheet, track your cash flow, or use whichever method you prefer. History tells us that when a global financial crisis happens, it’s good to be liquid and have funds available.
- What Is Liquidity Risk?
- Causes of Liquidity Risk
- Types of Liquidity Risk
Liquidity risk refers to the risk of not being able to buy or sell an asset quickly enough to prevent a loss or to meet financial obligations. This type of risk arises when there is a lack of marketability or when there is a sudden shift in market conditions, resulting in the inability to find a buyer or seller at a fair price. Liquidity risk can a...
Market Disruptions
Sudden shocks or events that impair market functioning can result in heightened liquidity risk. These disruptions can be caused by natural disasters, geopolitical events, or financial crises. They can lead to a rapid reduction in market liquidity, making it difficult for financial institutions to buy or sell assets to meet their obligations.
Market Liquidity Risk
Market liquidity risk arises when an organization is unable to execute transactionsat the desired price due to market conditions. It can occur due to various factors, such as low trading volume, market impact, and transaction costs.
- Credit risk. As a bond investor, your return will come from the payment of coupons and principal at the specified times, the reinvestment of those coupons, and any profit or loss if you sell the bond before its maturity date.
- Spread risk. Bonds issued by corporations or other entities that carry credit risk typically trade at a yield premium to bonds that are considered to be free from the risk of default, such as U.S. Treasury bonds.
- Downgrade risk. This refers to the risk that a bond issuer’s creditworthiness declines, causing its yields to move higher and bond prices to fall. It is called downgrade risk because deteriorating creditworthiness would likely cause the major rating agencies, such as Moody’s, Standard & Poor’s and Fitch, to lower their rating, or downgrade the bond.
- Liquidity risk. This risk occurs when the price where you can actually buy or sell a bond is different from the price indicated in the market. Investors may not be able to purchase or sell bonds in their desired amount, so bonds with liquidity risk will usually trade at higher yields than otherwise comparable bonds.
Oct 14, 2024 · A cash equivalent is an investment with a short-term maturity such as stocks, bonds, and mutual funds that can be quickly converted to cash. Liquid assets differ from non-liquid assets such as ...
- Steven Nickolas
- 2 min
Aug 22, 2024 · Liquidity Risk and Banks. Banks' liquidity risk naturally arises from certain aspects of their day-to-day operations. For example, banks may fund long-term loans (like mortgages) with short-term ...
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Oct 26, 2023 · Types of liquidity risk. Liquidity risk can be majorly categorized into two types. The first is funding liquidity risk, which refers to the inability to meet short-term financial obligations. The second is market liquidity risk, also known as asset risk, which arises when an asset cannot be quickly sold without significantly impacting its price.
