| Topic : Managing liquidity crisis |
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Credit Risk Management
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Activity:
Question posted: 05 27 2008 23:00:13 +0000,
3 answers, 467 views, last activity
03 21 2012 15:30:36 +0000
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Liquidity issues can interrupt hedging strategies and other risk management techniques. How do firms quantify or otherwise address these risks?
Well, GAP analysis(using Time Bucket) is still the best way to see the structural liquidity needs and obligations coupled with short term liquidity measurement- focusing in rise/fall in liquidity flow within 90 days. If it is added with liquidity ratio and credit deposit ratio, its fine enough. VaR for liquidity is still in evolving and testing phase. I would advise deployment of Early Warning Indicators and Scenario Analysis to know before liquidity becomes an issue.My comments are focussed to a bank and not for corporates.
Liquidity ratios are a commonly used tool to assess a company's liquidity risk.The concept itself is simple.For s given point in time, liquidity -adjusted assets are divided by liquidity- adjusted liabilities.If the resulting ratio is greater then , the company can feel fairly confident that its exposure to liquidity risk is acceptable.If the resulting ratio is too small the company will want to take steps to reduce the risk.
For example, the assets or the liability mix may need to be restructured.
I will use the example of building, owning and operating a new natural gas CC power plant. Some areas of liquidity risk that immediately come to mind include how much cash is tied up at any point in time, ability to raise debt, credit risk with can affect corporate liquidity, hedges including a PPA to sell electricity (or, in some cases, capacity), fuel supply hedges to ensure enough natural gas to operate, parts supply contracts to hedge capital costs, O&M contracts to hedge O&M costs for anything that is outsourced, etc. That should be enough to give you an idea.
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