Liability and Liquidity management

Question 1

what are examples of asset liquidity?

Answer 1

cash
treasury securities
CDs

Question 2

what are examples of liability liquidity?

Answer 2

repos

exchange settled funds

Question 3

what are the main aims of a liquid asset portfolio?

Answer 3

meet min liquidity requirements

provide buffer against fluctuations in liquidity

Question 4

what are the main aims of a liquid liability portfolio?

Answer 4

reduce the need to store large amounts of liquid assets (ie reduce opportunity cost)

Question 5

regarding the construction of a liquid asset portfolio, what are the two types of investment strategies?

Answer 5

aggressive and passive

Question 6

what does an aggressive liquid asset portfolio involve?

Answer 6

• actively managing securities
• engaging in higher risk activities=higher return
• expertise requirement

Question 7

what does an passive liquid asset portfolio involve?

Answer 7

• engaging in low risk activities/conservative activities

- no special expertise required

Question 8

what are two passive strategies?

Answer 8

ladder of maturity approach

buffer approach

Question 9

explain the ladder of maturity approach? what are weaknesses?

Answer 9

investment portfolio is evenly spaced across an investment horizon, ie 10 different bonds, with a range of maturities (1-10yrs), once mature, its reinvested.

doesnt take into account changes in industry
doesnt max opportunity, ie if interest rates were to increase you should invest in short term bonds.

Question 10

explain the buffer approach? what are weaknesses?

Answer 10

invest in securities that have a maturity of less than one year. buffers against liquidity risk.

low return, could increase interest rate risk.

Question 11

what are two aggressive strategies?

Answer 11

Barbell/split-maturity approach

Yield curve strategies

Question 12

explain the Barbell/split-maturity approach?

Answer 12

spliting investments into two catagories.
investing up 30% in short term securities (if i increases, min loss)
invest remaining in long term securities (in i decreases, increases MV and therefore capital gain)

Question 13

decribe playing the yield curve and riding the yield curve strategies?

Answer 13

playing: take advantage of expected future changes in interest rates, ie if yield increases, i rates increase, invest short term. if yield decreases, i rates decrease, invest long term.
riding: requires upward sloping curve, expected to remain at the same level, involves selling long term securities, at lower yield to earn capital gain. (ie selling premium bond)

Question 14

what are three main things to remember with yield curve strategies? in regards to i rates?

Answer 14

• if i expected to increase, invest in short term
• if i expected to decrease, invest in long term
• if i expected to increase and maintain the level of increase, invest long term and sell before maturity to make capital gain.

Question 15

what is the main aim of liability management? (3)

Answer 15

to hold the smallest amount of lliquid assets possible
low cost
low withdrawal risk- reduces liquidity risk

Question 16

what is the catch 22 with low cost and low withdrawal risk?

Answer 16

low cost funds are usually the ones with the highest withdrawal risk.

Question 17

who establishes AUS liquidity regulations?

Answer 17

APRA estabilished regulations aim to ensure that FI have sufficient liquidity to meet obligations
Follow Basel Agreements