Are the definitions below okay? Marketability - the time taken for a buyer to be found and asset to be sold. Liquidity - the time taken for the seller to receive cash after the asset has been sold. For example - a current account with a bank is a highly liquid asset as cash can be easily withdrawn from it. However, it is not marketable as it cannot be sold to another person.
Dear BDCD1, Have a look at Chapter 39, pp 10-12. The definition of liquidity depends very much on the context: Financial markets, ie assets which are traded In the context of the financial markets, liquidity risk is where a market does not have the capacity to handle the volume of an asset to be bought / sold at the time the deal is required. In this context, "liquidity" is also called "market liquidity" or "marketability". Assets which are not traded However, you're quite right, when we're not talking specifically about the financial markets, then an asset can be liquid but not marketable (eg a bank account). Liquidity risk for institutions For institutions, the term liquidity risk is used to describe how quickly an organisation might need to get their hands on cash. It depends therefore on the risks they take on, and their cashflow management policy. Liquidity risk will arise for different reasons, depending on the type of institution, eg banks, insurance companies, benefit schemes, collective investment schemes, non-financial institutions. The main sources of liquidity risk for each institution are described in Chapter 39 pp10-11. I hope this helps, Kind regards, Katherine.
I have seen lots of threads on here about this subject and it seems to cause a lot of problems. I think the main reason is that the examiners aren't always consistent with how they explain things and it doesn't need to be as confusing as it is. I have issue with April 2007 P1 Q2 ii) a) and b) in particular (I know others have also raised it) because it seems to say that volatility and liquidity are basically one and the same thing for traded assets. Surely this is not the case although they would normally be closely related. Could a tutor please confirm if this understanding is correct for traded assets: An illiquid asset is one where it cannot be traded quickly without having an adverse effect on the price. Hence, the transaction process could lead to volatility in the price. However volatility may exist in its own right, ie. a stock market may be going through a period of significant uncertainty about the economy and hence even large blue-chip companies could be exhibiting volatility when compared to cash. This may not necessarily be because large volumes are being traded.
