Question

A DI has $14 million in T-bills, a $9 million line of credit to borrow in the repo market, and $9 million in excess cash reserves with the Fed. The DI currently has borrowed $7 million in fed funds and $3 million from the Fed discount window to meet seasonal demands.

a. What is the DI’s total available (sources of) liquidity?
b. What is the DI’s current total uses of liquidity?
c. What is the net liquidity of the DI?
d. What conclusions can you derive from the result?

(For all requirements, enter your answers in millions.)

Answer 1

Solution:-

A. To Calculate DI;s total Available Liquidity-

Total Available Liquidity = T- Bill + Excess Cash Reserve + Credit to Borrow

Total Available Liquidity = $14 Million + $9 Million + $9 Million

Total Available Liquidity = $32 Million

B. To Calcuate DI’s current total uses of liquidity-

Current total uses of liquidity = Borrowed in fed Fund + Borrow from fed discount Window

Current total uses of liquidity = $7 Million + $3 Million

Current total uses of liquidity = $10 Million.

C. To calculate net liquidity of the DI-

Net liquidity = Total Available Liquidity - Current total uses of liquidity

Net liquidity = $32 Million - $10 Million

Net liquidity = $22 Million.

D. Conclusion - This Net liquidity of $32 Million suggest the DI that it can understand unexpected withdrawals without reducings its liquid Assets at fire sale prices.

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