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Liquidity: Examples and Explanation

Knowledge Base ID: 8.7.02

 

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Liquidity: Explanation and Examples

The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash.

  • An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash.
  • A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices.
  • An asset is said to be liquid if the market for that asset is liquid

The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash. An asset is liquid if it can easily be converted to cash.

The liquidity of an institution depends on:

  • the institution's short-term need for cash;
  • cash on hand;
  • available lines of credit;
  • the liquidity of the institution's assets;
  • the institution's reputation in the marketplace -- how willing will counter parties be to transact trades with or lend to the institution?

Source: http://www.riskglossary.com/link/liquidity.htm

Comments

Rajiv Vyas
8/10/09 @ 01:39 pm

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