Explanation:
Liquidity at Risk (LaR) is a metric used by financial institutions to estimate the maximum potential liquidity deficit or cash outflow that might occur over a given time horizon at a specified confidence level.
In this scenario, a 1-day LaR of USD 15 million at a 95% confidence level means that the institution is 95% confident that its net cash outflows (liquidity needs) over the next day will not exceed USD 15 million. Therefore, at the 95% confidence level, the worst expected outcome is a net cash outflow of $15 million.
Choice A is incorrect because LaR measures cash outflows/liquidity requirements, not accounting losses (which are typically measured by Value at Risk - VaR). Choice B is incorrect because LaR is concerned with downside liquidity risk (outflows), not profits. Choice C is incorrect because an inflow of cash represents an increase in liquidity, which is the opposite of liquidity risk.
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Q.2262 Bilco Bank has implemented the LaR (liquidity at risk) method based on a 95% probability and a 1-day holding period. Suppose its calculations for the next day result in a figure of USD 15 million. What would that imply?
A
The maximum loss over the next day is $15 million with a probability of 95%.
B
The maximum profit over the next day is $15 million with a probability of 95%.
C
The worst outcome over the next day is an inflow of cash of $15 million with a probability of 95%.
D
The worst outcome over the next day is an outflow of cash of $15 million with a probability of 95%.
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