Which of the following are types of Liquidity risk?

                      I.        Time risk

                    II.        Price risk

                   III.        Call risk

                  IV.        Funding risk

Solution

The liquidity risk in banks manifest in different dimensions: i)              Funding Risk – need to replace net outflows due to unanticipated withdrawal/nonrenewal of deposits (wholesale and retail); ii)             ii) Time Risk - need to compensate for non-receipt of expected inflows of funds, i.e. performing assets turning into non-performing assets; and iii)            Call Risk - due to crystallisation of contingent liabilities and unable to undertake profitable business opportunities when desirable. Price risk is a type of interest rate risk. Price risk occurs when assets are sold before their stated maturities. In the financial market, bond prices and yields are inversely related. The price risk is closely associated with the trading book, which is created for making profit out of short-term movements in interest rates.