Liquidity Risk Defined
Liquidity, which we define broadly as the availability of cash or equivalent resources, is the lifeblood of every commercial and sovereign entity. Liquidity allows expected and unexpected obligations to be met when needed so that daily business affairs can proceed uninterrupted. In the absence of sufficient cash resources activities may be jeopardized; more importantly, the probability of encountering more severe financial distress increases. Liquidity is therefore a vital element of financial management and must be considered and managed with care. In this introductory chapter we begin our review of liquidity by examining definitions of liquidity risk, and considering liquidity risk in relation to general corporate operations and other dimensions of financial exposure. We also outline key themes we intend to explore in the balance of the text.
KeywordsCash Flow Financial Institution Credit Risk Market Risk Liquidity Risk
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