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    Question

    Which of the following are types of Liquidity risk?

                          I.        Time risk

                        II.        Price risk

                       III.        Call risk

                      IV.        Funding risk

    A I, II and IV Correct Answer Incorrect Answer
    B I, II and III Correct Answer Incorrect Answer
    C I, III and IV Correct Answer Incorrect Answer
    D II, III and IV Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    The liquidity risk in banks manifest in different dimensions: i)              Funding Risk – need to replace net outflows due to unanticipated withdrawal/nonrenewal of deposits (wholesale and retail); ii)             ii) Time Risk - need to compensate for non-receipt of expected inflows of funds, i.e. performing assets turning into non-performing assets; and iii)            Call Risk - due to crystallisation of contingent liabilities and unable to undertake profitable business opportunities when desirable. Price risk is a type of interest rate risk. Price risk occurs when assets are sold before their stated maturities. In the financial market, bond prices and yields are inversely related. The price risk is closely associated with the trading book, which is created for making profit out of short-term movements in interest rates.

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