Week 5

Question 1

Liquidity risk

Answer 1

Risk that insufficient cash is available to meet obligations as they fall

Question 2

Liquidity funding risk (Financial & Non financial)

Answer 2

Risk of not being able to Raise Sufficient Cash to finance operations

Question 3

Liquidity trading risk(Financial)

Answer 3

Risk of not being able to Unwind Position in financial instruments at their theoretical price

Question 4

Liquidity funding risk Companies
Main Causes

Answer 4

-Poor financial performances leading to less creditworthiness
-Non available of credit in the financial systems
-Hedging issues, margin calls

Question 5

Liquidity funding risk Banks Main Causes

Answer 5

-Liquidity stressing the economy
-Overly aggressive funding decisions
-Poor financial performance

Question 6

Risk response Banks & Companies

Answer 6

-Implement liquidity risk management framework
-Maintain strong liquidity position
-Regular stress testing

Question 7

Liquidity black hole

Answer 7

Occurs when most market participants want to take one side of the market and liquidity dries up

Question 8

Negative feedback traders

Answer 8

-Buy when prices fall, sell when prices rise
-Leads to liquid, stable markets

Question 9

Positive feedback traders

Answer 9

-Sell when prices fall and buy when prices rise
-Leads to unstable markets

Question 10

Reasons for positive feedback trading

Answer 10

-Trend trading
-Stop-loss rules
-Margins, margin calls forcing traders to close out their positions
-Predatory trading