Latest posts
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đ° Money Market and Capital Market Instruments: The Battle of the Maturities
đŚ Why Do Banks Bother with Investment Securities? Imagine a bank as a hyperactive squirrel. It stores nuts $($cash$)$ for winter $($economic downturns$)$ and pulls them out when hungry. These “nuts” are investment securities, often making up 20% to 33% of a bankâs assets. Key Roles of Investment Securities: Theyâre known as âcrossroads accountsââpivoting between…
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đ¨ Early Warning Indicators: The Smoke Alarms of Liquidity Risk Management đ¨
Imagine you’re driving a car downhill with no brakes. Not a fun ride, right? Thatâs what liquidity risk feels likeâsmooth cruising until suddenly, thereâs no cash to fund obligations. Now imagine the dashboard of your car lights up a big red warning before the brakes fail. Thatâs an Early Warning Indicator $($EWI$)$. These EWIs are…
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đ§Funding and Transactions, Liquidity Risk, and Transaction Costs â Explained with Flow and Fun
What is Liquidity, Really? Liquidity is what gives an asset its spending power. If you can convert it into goods and services quickly and confidently, itâs liquid. Cash is the king of liquidity. Real estate during a crisis? Not so much â more like the stubborn prince who wonât get off the throne. In today’s…
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đŚ Collateral Markets and Leverage â The Tale of Borrowed Bling and Multiplied Mayhem đ°âď¸
𧊠Part 1: The Collateral Market â Borrowed Riches and Haircuts Welcome to the collateral market â the financial equivalent of borrowing your friend’s designer bag to impress someone on a date. You donât own it, but you get to strut with style â as long as you promise to return it safely. Why do…
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đ§ Sources of Liquidity Risk, Liquidity Transformation, and Systematic Funding Risk
âLiquidity is like toilet paper â you only notice it when it’s gone.â đ What is Liquidity, Anyway? In financial markets, liquidity refers to how easily an asset can be converted into cash without taking a bath on the price. So why do we care about liquidity? Because without it, even fundamentally sound financial institutions…
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đłď¸ Liquidity Black Holes and Positive Feedback Trading
Proverb: âWhen everyone runs for the exit, nobody fits through the door.â This sums up liquidity black holes in financial markets â not astrophysical ones, but theyâre just as terrifying for investors. đĽ What is a Liquidity Black Hole? Imagine you’re at a packed concert. Suddenly, someone shouts âFIRE!â Everyone rushes to exit at once,…
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đŚ FUNDING LIQUIDITY RISK: WHY âCASH IS KINGâ IN A CRISIS
Imagine a company as a camel in a desert. It doesnât matter how much gold $($assets$)$ it’s carrying â if it canât find water $($cash$)$, it wonât survive the journey. This is the essence of funding liquidity risk: the risk that a firm can’t meet its cash obligations as they come due. $\textbf{What is Funding…
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đ§ Trading Liquidity Risk: When Your Portfolio Tries to Sneak Out the Exit Door
Solvency vs. Liquidity: Not the Same Beast Letâs clear the fog: Solvency means you own more than you oweâyouâre still king $($or queen$)$ of your balance sheet. Liquidity, on the other hand, is whether you can pay your bills on timeâkingdom or not. So if solvency is about wealth, liquidity is about cash in hand.…