Understanding reduction in market liquidity and exposure valuation

BHeng9611

New Member
Hi all,

Refer to the attached, may I know what are the meanings of reduction in market liquidity and exposure valuation?

Correct me if I am wrong, reduction in market liquidity means market becoming less liquid, ie transaction cannot take place fast due to asking and bidding price keep on changing?

Thank you,
BX
 

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gsarm1987

FRM Content Developer
Staff member
Subscriber
@BHeng9611 You are correct.
In the screenshot, the point is that banks should think about how it's harder to figure out the value of their investments when markets slow down and become less active, just as you said. This can make it trickier to see how much risk they're taking from the market. It's a big deal when they're running tests to see how problems in the market might hurt their financial situation. imagine if they are in immediate need to sell an asset to settle their liability in an inopportune time and market gives them an adverse price because of lack of market depth or lack of money in the market. that impact needs to be considered
 
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