Types of Liquidity Risk
Liquidity risk is the risk that an organization will not have enough cash or other liquid assets to meet its financial obligations as they come due. There are two main types of liquidity risk:
- Funding liquidity risk: Funding liquidity risk is the risk that the organization will not be able to raise the funds it needs to meet its financial obligations. This can happen if the organization’s credit rating is downgraded or if there is a general shortage of liquidity in the market.
- Operational liquidity risk: Operational liquidity risk is the risk that the organization will not be able to generate enough cash to meet its financial obligations. This can happen if there is a disruption to the organization’s operations, such as a strike or a natural disaster.
MCQs on Types of Liquidity Risk
- Which of the following is NOT a type of liquidity risk?
- Funding liquidity risk
- Operational liquidity risk
- Market liquidity risk
- Credit risk
- The correct answer is market liquidity risk. Market liquidity risk is a type of market risk, not liquidity risk.
- Which of the following is the most common type of liquidity risk?
- Funding liquidity risk
- Operational liquidity risk
- Market liquidity risk
- Credit risk
- The correct answer is funding liquidity risk. Funding liquidity risk is the most common type of liquidity risk because it can happen to any organization, regardless of its size or industry.
- Which of the following is the most difficult type of liquidity risk to manage?
- Funding liquidity risk
- Operational liquidity risk
- Market liquidity risk
- Credit risk
- The correct answer is operational liquidity risk. Operational liquidity risk is the most difficult type of liquidity risk to manage because it is often unpredictable and can be caused by events that are beyond the organization’s control.
Conclusion
Liquidity risk is an important risk for organizations to manage. By understanding the different types of liquidity risk, organizations can better protect themselves from financial losses.