Which of the following is not a consideration in determining the liquidity needs of a firm (as opposed to determining the time horizon for liquidity risk)?

Which of the following is not a consideration in determining the liquidity needs of a firm (as opposed to determining the time horizon for liquidity risk)?
A . Speed with which new equity can be issued to the owners
B . Collateral
C . Off balance sheet items
D . The firm’s business model

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Answer: A

Explanation:

Managing liquidity requires understanding and providing for two things: the amount of liquidity needed to pay for all current obligations (in both normal and stressed scenarios), and determining the time horizon over which this liquidity should be available. The first is essentially a function of the business of the firm, and the assets and liabilities resulting from operations. The second considers other factors such as the speed with which new cash can be borrowed (eg, from the repo markets), the consequences are of running out of liquidity (eg, maybe only an overdrawn fee as opposed to bankruptcy), etc. In other words, liquidity risk management answers two questions: how much, and for how long.

This question asks for identifying the factors that affect the ‘how much’ part. Choice ‘d’, Choice ‘c’ and Choice ‘b’ do affect the determination of the liquidity needs of the firm.

Choice ‘a’ does not affect the liquidity needs, but the ‘how long’ part. Choice ‘a’ is therefore the correct answer.