Liquidity Risk

Tom Pooter Finc412 term paper liquidity Risk Liquidity luck affects either financial institution. Liquidity describes how easily an asset smoke be passeld without affecting the price of the asset. Thus it is in truth important to acquit into account fluidity insecurity as highly liquid assets can easily be traded and illiquid assets ar harder to trade. This is because illiquid assets cannot easily be converted to cash thus making it hard to trade them without the price changing. Liquid assets tend to hurl a dispirited return because they have a very low risk involved. Liquid assets argon traded in the retention foodstuff. It is called the property market place because the assets being traded atomic number 18 so liquid that they might as well be money and atomic number 18 very of a sudden term, which also lessens risk. Examples of highly-liquid assets traded in the money market are certificates of deposit, commercialized paper, treasury bills and municipal notes. Assets that are illiquid are very vulnerable to market turmoil. Illiquid assets cannot easily be turned into money and can easily change prices base on market rates. Illiquid assets are risky to own as the worth of these assets change promptly and one can recede or gain a large sum of money in a shortly time.

Due to the increased risk, returns are higher on medium for illiquid assets traded on the stock market compared to liquid assets traded on the money market. Examples of illiquid assets include houses, cars and types of debt instruments. There are two measure of fluidness risk, liquidity banquet and liquidity risk snap bean. Liquidity chap is defined as the net liqu id assets of a firm. The go against is posi! tive when the do of liquid assets exceeds the amount of volatile liabilities. Institutions with a negative gap need to restructure and find a way to frustrate more cash. Liquidity risk elasticity is defined as the change in net assets oer funded liabilities associated with an increase in the marginal funding cost. Financial institutions seem liquidity risk in a number of...If you neediness to get a spacious essay, order it on our website: OrderEssay.net

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