MGT411 GDB Spring 2019 Solution & Discussion Last Date: 01-08-2019

[+ M.Tariq Malik]

MGT411 GDB Spring 2019 Solution & Discussion Last Date: 01-08-2019

Discussion Question:

Liquidity is a term used to describe the ease with which an asset can be converted into cash. This is an important phenomenon as most of the time businesses face a situation where they have to meet sudden demand of cash or liquid funds that creates liquidity risk. Financial institutions particularly banks required to keep more liquid assets in order to fulfill demand of their depositors. Banks face liquidity risk on both sides i.e. asset and liability side of their balance sheet. On liability side, it is due to sudden deposit withdrawals and on asset side it is due to failure of banks to provide loans to their customers when demanded. This can turn to the risk of banks’ failure even if they have positive net worth. One way to manage liquidity risk is to hold sufficient excess reserves (beyond the required reserves mandated by the central bank) to accommodate customers’ withdrawals.

• Keeping this in mind and on the basis of information provided in following balance sheets of Bank A and B; which bank have more liquidity risk?  (Explain your answer with logical reasoning).                                                                         
• Also mention strategies for the banks to manage their liquidity risk.                         

Bank A		Bank B
Assets	Liabilities	Assets	Liabilities
Securities             100	Deposits               500	Securities               50	Deposits                500
Loans                   800	Borrowings          200	Loans                     800	Borrowings            200
Reserves                60		Reserves                30

Note:

For acquiring the relevant knowledge, do not rely only on handouts but also watch the course video lectures and read additional material available online or in any other mode.

Important Instructions:

• Your discussion must be based on logical facts.
• The GDB will open and close on above specified date and time. Please note that no grace day or extra time will be given for posting comments on GDB.
• Use the font style “Times New Roman” and font size “12”.
• Your answer should be relevant to the topic i.e. clear and concise.
• Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
• Books, websites and other reading material may be consulted before posting your comments, but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
• You should post your answer on the Graded Discussion Board (GDB), not on the Moderated Discussion Board (MDB). Both will run parallel to each other during the time specified above. Therefore, due care will be needed.
• Obnoxious or ignoble answer should be strictly avoided.
• You cannot participate in the discussion after the due date via email.
• Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

[+ M.Tariq Malik]

Please Discuss here about this GDB.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions. Read More>>

Discussed & be touched with this discussion. After discussion a perfect solution will come in a result at the end.

 

“How to Join Subject Study Groups & Get Helping Material”

 

P.S:    Please always try to add the discussion in proper format title like “CS101 Assignment / GDB No 01 Solution & Discussion Due Date: ___________”

 

Share below link with friends for solution & Discussion. A Single link for help in your education.

http://bit.ly/vucodes

 

Site Overview | Assignment Solutions | Past Papers |Site Features

[Mohsin Raza]

[+ M.Tariq Malik]

MGT411 GDP Solution Spring 2019

Below link

MGT411 GDP Solution Spring 2019

[+ M.Tariq Malik]

MGT411 GDP

Liquidity Risk:

Liquidity risk is the risk that a company or bank may be unable to meet short term financial demands. This usually occurs due to the inability to convert a security or hard asset to cash without a loss of capital and/or income in the process.

Examples:

Liquidity risk generally arises when a business or individual with immediate cash needs, holds a valuable asset that it cannot trade or sell at market value due to a lack of buyers, or due to an inefficient market where it is difficult to bring buyers and sellers together. Suppose Consider a $1,000,000 home with no buyers. The home has value, but due to market conditions at the time, there may be no interested buyers. In better economic times when market conditions improve and demand increases, the house may sell for well above that price. However, due to the home owner’s need of cash to meet near term financial demands, the owner may be unable to wait and have no other choice but to sell the house in an illiquid market at a significant loss. Hence, the liquidity risk of holding this asset.

1. The Below balance sheets of Bank A and B; which bank has more liquidity risk?

Bank A Bank B

Assets Liabilities Assets Liabilities

Securities 100 Deposits 500 Securities 50 Deposits 500

Loans 800 Borrowings 200 Loans 800 Borrowings 200

Reserves 60 Reserves 30

• Bank B has more liquid risk rather than Bank A because they have not sufficient Asset/reserve etc to fulfill the costumers demand.

• In Above Both Balance sheet Bank A has more Asset 960 rather than Bank B 880. Only the Liabilities are the same.

2. How banks to manage their liquidity risk.

There is two way the bank manages the liquidity risk

1. To Adjust the Assets

2. To Adjust liabilities

Example:

If bank to paid his customer so once they sold an asset to fulfill costumers demand so his liabilities will increase with the same amount and second they borrow from the central bank so his liabilities will increase with the same amount. But the bank does not like to meet their deposit outflows by contracting the asset side of the balance sheet because doing so shrink the size of the bank. so bank borrows from the central bank or another bank like borrow 260 Million rupees.

Bank A

Assets Liabilities

Securities 100 Deposits 500

Loans 800 Borrowings 460

Reserves 60

[+ M.Tariq Malik]

MGT411 GDB Solution

link 

MGT411 GDB Solution

[+ M.Tariq Malik]

Req. 1) which bank has more liquidity risk?

i) On the basis of securities:

                                          If a customer makes 5 withdrawals, the bank can’t simply deduct from its securities. But the bank B has less securities as compare to bank A. so, bank B have more liquidity risk.

ii) On the basis of Reserve:

                                       If a customer makes 5 withdrawals, the bank can’t simply deduct from its Reserves. But the bank B has less Reserves as compare to bank A. So, the Bank B has more liquidity risk.

Req. 2) also mentions strategies for the banks to manage their liquidity risk?

There are two ways to manage Liquidity Risk. They are:

• Adjusting Assets
• Adjusting Liabilities

[+ M.Tariq Malik]

MGT411 GDB Solution Spring 2019

link 

MGT411 GDB Solution Spring 2019