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Imagine an investor at a cocktail party: one guest is holding a glass of water $($cash$)$, another has a freshly squeezed orange juice $($stocks$)$, and then there’s the third — clutching a rare bottle of aged scotch locked in a vault $($private equity$)$. Welcome to the world of illiquidity premiums — where holding on longer…

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When we think of markets, we often imagine a fast-paced Wall Street floor, where prices flash like strobe lights and everything is one click away from being bought or sold. But in reality, most asset classes are more like a sleepy auction house than a stock ticker. Welcome to the world of illiquid markets —…

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The Bank’s Balancing Act: Income vs. Net Worth Banks aren’t just glorified piggy banks. They juggle loans, deposits, securities, and borrowings—all while managing risks from the ever-dancing interest rates. Previously, we learned how banks manage the Net Interest Income $($NII$)$ using Interest-Sensitive $($IS$)$ Gap Analysis. But what if interest rates go haywire and slash not…

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🧠 Why Do Banks Obsess Over Interest Rate Risk? Imagine a bank as a giant sandwich shop. The bread (liabilities) is what customers give you $($like deposits$)$, and the filling $($assets$)$ is what you use it for $($like giving loans$)$. The flavor of your sandwich $($i.e., profitability$)$ depends on the spread between what you pay…

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Covered Interest Parity $($CIP$)$: The Financial Law of Gravity Imagine two identical vending machines in two countries. One takes U.S. dollars $($USD$)$ and the other takes foreign currency $($FC$)$. Covered Interest Parity $($CIP$)$ says that, if you’re smart, lazy, or both, there shouldn’t be a way to make risk-free profit just by moving money between…

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🧠 Introduction: The World’s Favorite Currency $($But on Loan$)$ The U.S. dollar isn’t just America’s business—it’s the world’s business. Banks from Zurich to Tokyo hold U.S. dollar assets like they’re golden tickets. But when the music stopped during the 2007–2009 financial crisis, everyone needed dollars… and there weren’t enough chairs $($or dollars$)$ to go around.…

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Imagine a party where everyone enjoys the music, but no one wants to pay the DJ. That was the state of liquidity pricing before the global financial crisis. Banks were dancing to the rhythm of cheap funding, ignoring the true cost of liquidity. Then came 2008 — the music stopped, and everyone scrambled to pay…

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Imagine a giant office building with one central water tank. Marketing wants constant coffee. IT needs chilled water for servers. Finance needs to water their money plants (and yes, they’re fake). But someone has to manage how much water goes where, how it’s paid for, and who gets the bill. In banking, liquidity is that…

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