ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Liquidity risk occurs when an individual investor, business, or financial institution cannot meet its short-term debt obligations. The investor or entity might be unable to convert an asset into cash without giving up capital and income due to a lack of buyers or an inefficient market.

Detailed explanation-2: -Liquidity risk is defined as the risk of incurring losses resulting from the inability to meet payment obligations in a timely manner when they become due or from being unable to do so at a sustainable cost.

Detailed explanation-3: -There are two different types of liquidity risk. The first is funding liquidity or cash flow risk, while the second is market liquidity risk, also referred to as asset/product risk.

Detailed explanation-4: -Asset liquidity refers to how easily an entity can convert their assets into cash. Liquidity risk is determined by an entity’s ability to repay its debts without incurring severe losses, in worst cases resulting in bankruptcy.

Detailed explanation-5: -In this section we identify and define three main types of liquidity pertaining to the liquidity analysis of the financial system and their respective risks. The three main types are central bank liquidity, market liquidity and funding liquidity.