Liquidity Risk

Abstract

Liquidity is a phenomenon to keep firmly in mind when managing the risk of a firm. Formally speaking, the liquidity risk of a company can be defined as the loss that may occur due to events that affect the availability of resources needed to meet liability obligations, whether this is due to an inability to sell assets, an unexpected reduction in trade liabilities or the closure of usual sources. In other words, liquidity risk is caused by the fact that the company has to make recurring payments but the timing of these payments does not usually coincide with receiving income, and their wealth is not stored as money but, conversely, part of it is kept in assets. When the time comes to deal with a payment, a situation may arise in which the company cannot find an entity willing to finance it in market conditions, and these assets cannot be sold without offering a large discount because of a lack of interested counterparties or directly because the company cannot find a counterparty to contract with.