Which of the following is a most complete measure of the liquidity gap facing a firm?

Which of the following is a most complete measure of the liquidity gap facing a firm?
A . Residual liquidity gap
B . Liquidity at Risk
C . Marginal liquidity gap
D . Cumulative liquidity gap

View Answer

Answer: A

Explanation:

Marginal liquidity gap measures the expected net change in liquidity over, say, a day. It is just equal to the liquidity inflow minus liquidity outflow. The cumulative liquidity gap measures the aggregate change in liquidity from a point in time, in other words it is just the summation of the marginal liquidity gap for each of the days included in the period under consideration. The residual liquidity gap goes one step further and adds available ‘opening balance’ of liquidity to the cumulative liquidity gap to reveal the days or times when the net liquidity is most at risk.

Liquidity at Risk measures the expected time to survival at a certain confidence level applied to the firm’s cash flows – and is not a measure of the liquidity gap. Therefore Choice ‘a’ is the correct answer.