Venter - Modeling and Managing Liquidity Risk

Question 1

Liquidity Risk

Answer 1

Basic liquidity risk is the chance of not having funds available to pay liabilities due.

Other liquidity risk:

• being forced to post collateral
• realizing losses because of forced sale of immature assets
• loss of investment opportunities due to cash constrains

Normally liquid assets could become iliquid with severe market disruption

Question 2

Liquidity management

Answer 2

1. Maintain a stock of liquid assets
2. Match cash flows of assets and liabilities
3. Contingency funding plans (may fail to work under a market disruption)
4. Specify liquidity of various assets and liabilities in the capital management model formulation and evolve them over time