Liquidity risks

[shanlane]

Hello,

There is a statement about liquidity risks that I am havgin trouble wrapping my head around. Thus is talking about OTC markets:

Many different matching exposures increases market depth and decreases liquidity risk. A problem arises when there are huge risk concentrations that provide the market depth, thereby increasing liquidity risk.

What exactly is this trying to say?

Also, in the same chapter the cost of liquidity is measured as:

Liquidation value - mark to market value

Since the Liquidation value is presumably less than the Mark to market value, would this term be negative?

The idea is simple enough, but the signs of a lot of these metrics is really inconsistent, especially because of all of the different authors.
Thanks!

Shannon

 

[ChadWOB]

Shannon,

I just had the same issue.

Liquidation Value - MV should be a negative value (Schweser Practice Exam 1, question 48. However, they note that since it is a net loss of value, the answer is quoted as a positive figure.

Since its Schweser, I take it with a grain of salt and although easy, hope not to see this question on the exam.