BUS-F 446 Lecture Notes - Lecture 5: S&P 500 Index, Eurodollar, Ted Spread

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30 Apr 2016
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Liquidity risk wasn"t really in focus until the financial crisis. Fis are highly levered (high levels of exposure: heavily rely on short-term borrowings, if liquidity becomes an issue the whole way of business is in danger. High liquidity risk: brokers/dealers, finance companies, depository institutions banks (their difficulties lead to system-wide issues) Moderate: life insurance companies (somewhat predictable claims payouts) Low: mutual funds, hedge funds, pension funds, p&c insurance companies. Liability: low cash holdings selling off assets too quickly; faster sale lower price. Asset: loan commitments liquidity risk. Customer"s deposit demand has seasonal patterns tax season for example. In low interest rate environment, customers tend to leave deposits in banks. High i% withdrawals for outside investments. Banks lending to each other, fed controls short-term interest rate (usu. Borrowed funds aren"t fdic-insured; thus, they need a higher rate of return. Short-term borrowing rates (like libor) they exploded during the crisis.

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