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Asset and liability management (often abbreviated ALM) is the term covering tools and techniques used by a bank or other corporate to minimise exposure to market risk and liquidity risk through holding the optimum combination of assets and liabilities. [1]
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold.
Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because nobody in the market wants to trade for that asset. Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade.
Liquidity is also equally important. There's been a lot of recognition that what counts with liquidity and discount windows and how LCR has done I think is very important. Second is competition.
Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible.
For non-financial firms, the priorities are reversed, as "the focus is on the risks associated with the business" - ie the production and marketing of the services and products in which expertise is held - and their impact on revenue, costs and cash flow, "while market and credit risks are usually of secondary importance as they are a byproduct ...
The Fidelity Money Market Fund invests in short-term securities to produce a high level of current income while maintaining stability and a high level of liquidity. The securities purchased may be ...
Liquidity risk: the company is unable to fund itself or is unable to meet its obligations; overlapping the above; Market risk: changes in market prices (typically foreign exchange, interest rates, commodities) cause losses to the business; Credit risk: that a counterparty default causes loss to the business.