Liquidity Risk

Liquidity Risk is the risk that a firm will not be able to meet its current and future cash flow and collateral needs, both expected and unexpected, without materially affecting its daily operations or overall financial condition. It arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade for that asset. It becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade. Financial firms are especially sensitive to funding liquidity risk since debt maturity transformation is one of their key business areas.