Financial Risk Manager Part 1

Explanation

Funding liquidity risk is indeed the possibility that a bank or any financial institution could find itself unable to settle obligations as soon as they are due. This risk arises when a company is unable to meet its short-term financial obligations due to insufficient cash, cash equivalents, or limited access to funding sources. This inability to settle obligations on time can have severe consequences, including:

• Reputational damage
• Loss of confidence from customers and investors
• Increased borrowing costs
• In extreme cases, insolvency or bankruptcy

Therefore, managing funding liquidity risk is crucial for the survival and success of any financial institution.

Why other options are incorrect:

Choice B describes interest rate risk, not funding liquidity risk. Interest rate risk refers to the potential for investment losses due to a change in interest rates, not the inability to meet obligations as they come due.

Choice C relates to liquidity management strategies but does not define funding liquidity risk accurately. It describes the objective of liquidity management rather than the risk itself.

Choice D describes model risk, which is the risk of loss resulting from the use of insufficiently accurate models to make decisions when valuing financial securities or making investment decisions.