Hello VU students here is the solution of MGT411-Money
and Banking GDB#1
Spring 2019. GDB total marks 5. GDB due date Aug 1, 2019. GDB Solution file. You also like our Facebook Page, Join Facebook Group, follow on Google+ and Subscribe our YouTube Channel. Please Share it with your Friends.
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Solution for the
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GDB Solution:
Liquidity Risk:
Liquidity risk is the risk that a company or
bank may be unable to meet short term financial demands. This usually
occurs due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process.
Examples:
Liquidity
risk generally
arises when a business or individual with immediate cash needs, holds a valuable asset that it cannot trade or sell
at market value due to a lack of
buyers, or due to an inefficient market where it is
difficult to bring buyers and sellers together. Suppose Consider a $1,000,000
home with no buyers. The home obviously has value, but due to market conditions at the time,
there may be no interested buyers. In better economic times when market
conditions improve and demand increases, the house may sell for well above that
price. However, due to the home owner’s need of cash to meet near term financial demands, the owner
may be unable to wait and have no other choice but to sell the house in
an illiquid market at a significant
loss. Hence, the liquidity risk of holding this asset.1. The Below balance sheets of Bank A and B; which bank have more liquidity risk?
|
Bank A
|
Bank B
|
||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|
Securities
100 |
Deposits 500
|
Securities 50 |
Deposits 500
|
|
Loans 800 |
Borrowings 200
|
Loans 800 |
Borrowings 200
|
|
Reserves 60 |
|
Reserves 30 |
|
·
Bank B have more liquid risk rather than Bank A, because they
have not sufficient Asset/reserve etc. to fulfill the costumers demand.
·
In Above Both Balance sheet Bank A have more
Asset 960 rather than Bank B 880. Only the Liabilities are the same.
2. How
banks to manage their liquidity risk.
There is two way
the bank mange the liquidity risk
1. To Adjust the Assets
2. To
Adjust liabilities
Example:
If bank to pay his customer so
once they sold asset to fulfill costumers demand so his liabilities will
increase with same amount and second they borrow from the central bank so his
liabilities will increase with same amount. But bank do not like to meet their
deposit outflows by contracting the
asset side of the balance sheet because doing so shrink the size of the bank. So
bank borrow from central bank or from another bank like borrow 260 Million
rupees.
|
Bank
A
|
|
|
Assets
|
Liabilities
|
|
Securities
100 |
Deposits 500
|
|
Loans 800 |
Borrowings 460
|
|
Reserves 60 |
|
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