Solvency is obviously important to any company. Even the financial crises of 2008-2009 were partly due...

Solvency is obviously important to any company. Even the financial crises of 2008-2009 were partly due to some liquidity risk and to this day we are still learning about these risk even more. Financial institutions rely on some form of cash for difficult times. Briefly discuss one real example of liquidity risk and also list a pro and a con for that example.

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Expert Solution

Liquidity risk is the risk of the firm on defaulting it's short term liability due to cash crunch .

One of the example of liquidity risk is s firm who is investing into long term projects by getting financed through short term loans so there is a major risk as the payment related to the project will be short term repayment of periodic payments while the cash inflows will be in longer period so there will be a cash crunch.

Pro of liquidity risk is it keeps a firm always with a precautionary amount of cash.

Cons of liquidity risk is that if you are in too much of cash , you will lose out on better investment opportunities.

jeff jeffy answered 2 years ago

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