Financial Risk Manager Part 1
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D. Funding liquidity describes the ability of an investor to raise short-term debt while market liquidity is the ability to raise long term capital.
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A
Funding liquidity refers to the ease with which investors can obtain funding from financiers by using purchased assets as collateral, while market liquidity refers to the ease with which investors can raise money by selling their assets.
B
Market liquidity refers to the ease with which investors can obtain funding from financiers by using purchased assets as collateral, while funding liquidity refers to the ease with which investors can raise money by selling their assets.
C
Funding liquidity and market liquidity are essentially the same concept and can be used interchangeably.
D
Funding liquidity describes the ability of an investor to raise short-term debt while market liquidity is the ability to raise long term capital.
Explanation:
Explanation
Funding liquidity and market liquidity are two distinct concepts in finance:
Funding Liquidity: Refers to the ease with which investors can obtain funding from financiers by using purchased assets as collateral. This essentially means how easily an investor can borrow money against their assets.
Market Liquidity: Refers to the ease with which investors can raise money by selling their assets. This means how quickly and easily an asset can be sold without significantly affecting its price.
Why other options are incorrect:
- Option B: Reverses the definitions of funding and market liquidity
- Option C: Incorrectly states they are the same concept when they are distinct
- Option D: Incorrectly associates funding liquidity with short-term debt and market liquidity with long-term capital, when the key distinction is about borrowing against assets vs. selling assets
The correct understanding is that funding liquidity involves borrowing against assets, while market liquidity involves selling assets directly.
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