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Liquidity Risk: Mohamad Syairazi Bin Mohd Affendy (233241) Group B

The document discusses liquidity risk, which is the risk that a company cannot meet its short-term financial obligations due to insufficient cash. There are two main types of liquidity risk: funding liquidity risk, which relates to cash flow and ability to meet obligations, and market liquidity risk, which is the inability to easily sell assets to obtain cash. Liquidity risk can arise from incomplete markets, asymmetric information, moral hazard, and adverse selection. Financial risk management aims to counter liquidity risk through supervision, regulation, and effective monitoring mechanisms.

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42 views2 pages

Liquidity Risk: Mohamad Syairazi Bin Mohd Affendy (233241) Group B

The document discusses liquidity risk, which is the risk that a company cannot meet its short-term financial obligations due to insufficient cash. There are two main types of liquidity risk: funding liquidity risk, which relates to cash flow and ability to meet obligations, and market liquidity risk, which is the inability to easily sell assets to obtain cash. Liquidity risk can arise from incomplete markets, asymmetric information, moral hazard, and adverse selection. Financial risk management aims to counter liquidity risk through supervision, regulation, and effective monitoring mechanisms.

Uploaded by

Syai Genj
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MOHAMAD SYAIRAZI BIN MOHD AFFENDY (233241) GROUP B

SUMMARY

LIQUIDITY RISK

Financial risk management is the economic practice for the firm by using financial

instruments to manage exposure to risk. There are many type of risk such as liquidity risk,

market risk, operational risk, measuring risk and another else. Each type of risk has different

meaning and use for company. “Liquidity risk is the risk that a company unable to meet the

short term financial demand” (http://www.investinganswers.com/). “Liquidity risk is the risk

stemming from the lack of marketability of an investment that cannot be bought or sold quickly

enough to prevent or minimize the loss (http://www.investopedia.com/). “Probability of loss

arising from a situation where will not be enough cash to meet the needs of depositors and

borrowers, sale of illiquid assets will yield less than their fair value or illiquid assets will not

be sold at the desired time due to lack of buyers” (http://www.businessdictionary.com/). There

are many scholars come with different term of meaning for this liquidity risk but the basic

knowledge for this problem is the asset cannot be change easily to get the cash in hand. There

are two main causes of liquidity risk which are the complete markets and asymmetric

information. These two causes will lead to the moral hazard and adverse selection. Typically,

liquidity risk can be divided into two types which are funding liquidity risk and market liquidity

risk. Funding liquidity risk is the current ratio or quick ratio which concern to the cash flow.

Market liquidity risk is the asset illiquidity which is inability to easily exit a position. However,

in financial risk management have their way to counter this problem which is by using their

fundamental weapon. There are two type of fundamental weapon that will be use by financial

risk management which are supervision and regulation. In other option, we can minimize the

liquidity risk by using the effective monitoring mechanisms to control or avoid moral hazrd

and asymmetric information.

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MOHAMAD SYAIRAZI BIN MOHD AFFENDY (233241) GROUP B

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