Liquidity Risk

Tom Pooter Finc412 term paper unruffled 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 rattling important to acquit into account fluidity bump 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 do it hard to trade them without the price changing. Liquid assets tend to stimulate a dispirited return because they have a very low risk involved. Liquid assets atomic number 18 traded in the lieu foodstuff. It is called the property grocery store because the assets being traded argon so liquid that they might as well be coin and argon 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 tha t are illiquid are very vulnerable to market turmoil. Illiquid assets cannot easily be turned into money and can easily change prices establish on market rates. Illiquid assets are risky to own as the worth of these assets change promptly and one can move back 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, fluidness banquet and liquidity risk snap bean. Liquidity chap is defined as the net liquid assets of a firm. The whirl is positive when the bi! ll of liquid assets exceeds the amount of volatile liabilities. Institutions with a negative gap need to restructure and find a way to grow 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 full essay, order it on our website: OrderEssay.net

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