1. Home
  2. |  
  3. Bank Recruitment |  

Banking Term : Liquidity Risk

Oct 6, 2015 11:42 IST

    When a company or Firm is unable to reach its short term financial demands for preventing loss, then this risk is known as liquidity Risk.

    Causes of liquidity Risks: - Such risks arise mainly when

    - A Party is looking for trading of an asset, but there is no one who wants to trade for it.

    - Liquidity risks also occur due to uncertain liquidity, generally when institution’s credit rating falls.

    - A Company may also face such financial risks if market on which it is dependant is subjected to liquidity loss.

    - Difficulty in selling of Collateral is also one of the major reasons for liquidity Risks.

    Types of liquidity Risks: - There are basically two types of liquidity risk.

    a. Funding Liquidity: - This risk includes the following points.

    -  Liabilities cannot be met when they fall due.

    -  Liabilities can Be only name specific.

    -  Can only be met at an uneconomical price.

    b. Market Liquidity: - Market liquidity can be calculated by: -

    -  Widening Bid

    -  Lengthening of holding period for VaR calculations

    -  Making explicit liquidity reserves.

    Apart from the above measures, there are five derivatives created especially for guarding liquidity risk proposed by Bhaduri, Meissner and Yuan: -

    -  Withdrawal option: A part of the illiquid underlying at market price.

    -  Return Swap: Swap the underlying’s return for LIBOR paid periodically.

    -  Return swaption: Option to enter into the return swap.

    -  Liquidity option: “Knock-in” barrier option, where the barrier is a liquidity metric.

    -  Bermudan-style return put option: Right to put the option at a specified strike.

    Latest Videos

    Register to get FREE updates

      All Fields Mandatory
    • (Ex:9123456789)
    • Please Select Your Interest
    • Please specify

    • ajax-loader
    • A verifcation code has been sent to
      your mobile number

      Please enter the verification code below

    This website uses cookie or similar technologies, to enhance your browsing experience and provide personalised recommendations. By continuing to use our website, you agree to our Privacy Policy and Cookie Policy. OK

    Register to view Complete PDF