Liquidity Risk

Tom Pooter Finc412 term paper fluidity 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 precise important to acquit into account fluidity peril as highly placid assets can easily be traded and illiquid assets ar harder to trade. This is because illiquid assets cannot easily be converted to cash thus reservation it hard to trade them without the price changing. Liquid assets tend to hire a dispirited return because they have a truly low risk involved. Liquid assets argon traded in the belongings foodstuff. It is called the bills food market because the assets being traded argon so liquid that they might as well be cash and ar very of a sudden term, which also lessens risk. Examples of highly-liquid assets traded in the money market ar certificates of deposit, commercialized paper, treasury bills and municipal notes. Assets that are illiq uid are very vulnerable to market turmoil. Illiquid assets cannot easily be turned into money and can easily change prices found on market rates. Illiquid assets are risky to own as the worth of these assets change promptly and one can retreat 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 b ean. Liquidity chap is defined as the net l! iquid assets of a firm. The snap is positive when the mensuration of liquid assets exceeds the amount of volatile liabilities. Institutions with a negative gap need to restructure and find a way to nettle 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(a) essay, order it on our website: OrderCustomPaper.com

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