2.1 Definition of liquidity risk management
Liquidity is one of the most dangerous factors affecting firms, financial intermediaries and the economy as a whole, because everyone is concerned with liquidity. We have the investor and the borrower; the investors feel uncertainty about being repaid and the borrowers worry if they will not be able to attract any funders and also risk not being able to repay back the money. The banks come to reduce the risk in this issue which will be discussed later in the paper. (Diamond and Rajan 1999)
Goodhart (2008) Discussed the relation between liquidity and solvency, he stated that as soon as the bank is in an adequate liquidity position then the bank is solvent which means there’s ability to pay loans
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As Pastor and Stambaugh (2001) stated that amount of money earned out of trading big amount of goods without increasing or reducing the price is actually the definition of liquidity.
As Subramoniam (2015) illustrated liquidity risk management as it’s how the bank can manage covering liabilities or paying for assets, the ability of managing both at low costs is done easily by a capable bank. Pandey (2010) also added that liquidity risk is defined is according to the situation; firstly, liquidity risk management can be defined as the incapability to liquidate the assets. Secondly, the amount of liquid cash available reflects the capability of paying dividends. Which gives a conclusion that the higher liquidity the higher the assurance of paying the
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Secondly, “tightness” the larger the difference between bid and offer, the higher the risk. Thirdly, “immediacy” time interval that a certain transaction can be done. Fourthly and lastly, “resilience” getting back to the equilibrium after any market collapse.
Three of the last four dimensions were discussed in another article by Kyth (1985) as again the bid-offer and its integration between buyer and seller positions and referred to the “depth”, as how can the price change in accordance with the transaction. And the “resilience” is returning to the original price after any instability.
Back to Subramoniam (2015) we have the second type of liquidity risk is the funding liquidity risk, actually it’s a risk that the bank won’t be able to defense against any shocks like any need of cash flows without any drop in everyday
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
LifePoint Hospitals was founded in 1999 and has grown to be a leading hospital company with more than $3 billion in revenues and 54 hospital campuses in 18 states. They have more than 23,000 employees and nearly 3,000 physician partners striving to achieve their hospital’s mission and goals.
It is another indicator of liquidity which is determined by subtracting inventory from the current assets and dividing by current liabilities. Inventories are less liquid asset, so it is eliminated in determining this ratio. This ratio is already very less and every quarter it is decreasing which indicates about the poor financial health of the company. But in case of Chevron this ratio is far ahead and fluctuates between 1.35 to 1.46, whereas Exxon values are fluctuating within the range of 0.79 and 0.61. Chevron liquidity positi...
In normal times, the monetary authority (usually a central bank or finance ministry) can stimulate the economy by lowering interest rate targets or increasing the monetary base. Either action should increase borrowing and lending, consumption, and fixed investment. When the relevant interest rate is already at or near zero, the monetary authority cannot lower it to stimulate the economy. The monetary authority can increase the overall quantity of money available to the economy, but traditional monetary policy tools do not inject new money directly into the economy. Rather, the new liquidity created must be injected into the real economy by way of financial intermediaries such as banks. In a liquidity trap environment, banks are unwilling to lend, so the central bank's newly-created liquidity is trapped behind unwilling lenders.
Liquidity premium theory – It is a theory that suggested that the yield of securities in one mature have influence on the yield of another securities. The investors are willing to invest in long-term securities as long as they are provided liquidity premium as compensation due to their long exposure to the long-term risk. As a result of this compensation, the investors are more motivated to in long-term securities. Hence, creating an upward sloping yield curve.
The current ratio is a liquidity ratio that measures a company’s ability to pay short-term and long-term obligations. They seek to satisfy their liquidity needs through cash provided by operations, long-term secured and unsecured borrowings, issuances of debt and equity securities, asset-backed securitizations, property dispositions and joint venture transactions. They have financed our operations and acquisitions to date through the issuance of equity securities, borrowings under their credit facilities and asset-backed securitizations. Going forward, they expect to meet their operating liquidity requirements generally through cash on hand and cash provided by operations. They believe their rental income, net of operating expenses and recurring
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
...s the example of the price of the gold to determine the relationships between the Linear Algebra and the Financial World. The uses of the financial concepts and the mathematics equations generally support the author’s aim of the price changing in different period of time. As the mathematics research article, it has clearly uses the symbols and equations to support the point of view of the author which shows the result of the element of the completed market and the changes of the price. However, it is not easy for a people who lack of mathematics knowledge to understand the concepts and equations of the mathematics. It will be easier for them to read and understand the author’s explanation if there are more explain on the equations or more wording explanations. Overall, Barbara Swart had been clearly explained the relationship of Linear Algebra and Financial World.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
A banking failure of Lehman Brothers had considerable negative influence on economics and financial markets worldwide. Beginning from the point what it could have been/be done, several authors agree that LB’s bankruptcy could have been/be anticipated (Christopoulos et al., 2011; Maux and Morin, 2011). They perceive a major problem in unwillingness or incapabil...
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations.
Operational risks are risks that may occur in the day to day activities, which may involve the process, systems, or people. Strategic risks are those risks involved with strategy. Positioning ones’ company with the right alliances and competing with fare prices will help affect future operational decisions. Compliance risks involve the many legislations and regulations a company must follow. The results could lead to high penalties and a company’s reputation could take a hit. Lastly, financial risks are always being monitored because oil, fuel, and currency rates are constantly fluctuating. By monitoring the fluctuating rates determines fare cost and balancing of the budget. “Like in any other industry, the risk exposure quantifies the amount of loss that might occur from any particular activity” (Genovese,
Risk is the potential loss resulting from the balance of threat, vulnerabilities, countermeasures, and value. ...
By analyzing how the banks conduct their traditional function, there rises a question of why the borrowers and lenders do not choose direct deal with each other? Which leads to the consideration of the theoretical rational for the existence of banks. This analysis is presented in section 3, which have an intensive expatiation in the theories. In section 4, what are the problems if the direct deals between the borrowers and lenders happen, and how can banks solve those problems are presented therefore answer the question why individuals are willing to pay the intermediation costs.