MEASURING AND MANAGING LIQUIDITY RISK

OVERVIEW

Liquidity risk is fundamental to the management of any financial operation.  As we have seen during the recent credit crunch and sub-prime meltdowns, the lack of liquidity can bring down the largest of firms and cause global market to freeze. At its simplest, it is the risk that a financial asset cannot be sold or financed at the expected price.  The best known example is a bank with long-term loans which suffers a loss of confidence leading to the withdrawal of demand deposits.  This ‘run’ on the bank can cause the institution to fail if sufficient liquidity cannot be accessed to fund the long-term assets, and hence liquidity risk management is a major regulatory focus.

The course provides a detailed introduction to the measurement and management of liquidity risk.  In the first part, liquidity risk is introduced and its impact on the pricing and funding of individual securities is explained. The fundamentals of a liquidity risk management framework are then presented in the context of contemporary regulatory requirements and firm-wide liquidity management techniques are considered.  Finally, the course discusses the effects of liquidity squeezes and the availability of risk capital on the broad market. Market oriented examples are given throughout to give participants insight into practical liquidity risk management techniques in the current environment.

KEY LEARNING OBJECTIVE

At the end of this program, participants will;

• Learn the best practice methods for measuring and managing liquidity risk in today’s turbulent market environment.
• The effects of liquidity risk on securities pricing and funding
• The challenges of building a successful framework for liquidity risk management
• The regulatory requirements for liquidity
• Effective liquidity stress testing and contingency planning
• The techniques for modeling liquidity risk within a treasury framework
• The impact of liquidity in the debacle of LTCM
• The role of liquidity risk in the downfall of a firm

COURSE CONTENT

• Understanding the Nature of Liquidity Risk
• Liquidation and “fire-sales”.
• Securities Pricing in the Presence of Illiquidity
• Foreign currency liquidity management
• Liquidity Risk in the Treasury Framework
• Measuring Market Risk: Liquidity-Adjusted Value-at-Risk
• Systemic Changes in Liquidity and Volatility

COURSE DURATION: 3 Days