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The Future of Risk Management Part 1: Forecasting Liquidity

Part 1 of I Know First's series on the future of risk management
Read the full article here:https://iknowfirst.com/know-first-future-risk-management-part-1-forecasting-liquidity

Part 2: Quantifying Uncertainty- https://iknowfirst.com/the-future-of-risk-management-part-2-quantifying-uncertainty

I Know First is a fintech company that provides state of the art self-learning AI based algorithmic forecasting solutions for the capital markets to uncover the best investment opportunities. The company provides daily investment forecasts based on an advanced, self-learning algorithm.

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The Future of Risk Management Part 1: Forecasting Liquidity

  1. 1. The Future of Risk Management Part 1: Forecasting Liquidity
  2. 2. What is a liquidity forecast? ● A prediction of a company or market’s cash flows at some future point in time ● Allows companies to ○ pinpoint potential times that available sources of credit would not be able to cover cash shortages ○ identify if there is an excess of liquid assets which can then be utilized for other initiatives ● Uses past cash forecasts to predict future
  3. 3. Cash Forecasts Cash Forecasts Capital Budgets Cash History Operating Budgets Business Units
  4. 4. Types of Liquidity ● Committed ○ Assets that have already been promised and will not be taken away under any circumstances ○ Clearly defined terms between lender and borrower ● Uncommitted ○ Agreement between lender and borrower to make short term funding available if necessary ○ No clearly defined terms ● In times of volatility, uncommitted liquidity may be decreased significantly whereas committed liquidity will stay stable
  5. 5. Factors of Liquidity ● Cash Flow- difference between inflows and outflows for a company ○ Liquidity drag- cash inflow is either reduced or delayed ○ Liquidity pull- cash outflow increases ● Management policies and control of cash flow ○ More risk averse company → more likely to have liquid cash balance ● Ability to raise cash ○ If company canis increase its cash without taking a loan→ it is more likely to invest more of its cash flow.
  6. 6. Measuring Liquidity Short Term- Quick Ratio Cash + Cash Equivalents + Short Term Investments + Current Receivables Current Liabilities Quick Ratio = Long Term- Current Ratio Current Assets Current Liabilities Current Ratio =
  7. 7. A Macro Picture: Market Liquidity ● Market Liquidity- ease at which market participants can buy or sell assets with minimal cost, risk, or inconvenience ● Market liquidity risk- loss that occurs when a trade is made at a non- equilibrium price ● In general, market liquidity refers to a market’s depth, breadth, and resilience in combination with time.
  8. 8. Measuring Market Liquidity ● 4 main inputs ○ Transaction cost ○ Volume ○ Equilibrium price ○ Market impact ● Presence of dark pools where large volumes of stock change hands obscures the real values → more accessible substitutes are market’s depth, breadth, and resilience.
  9. 9. Measuring Market Liquidity ● Market depth- change in volume of transactions based on a change in price ● Market breadth- number of stocks that are rising in comparison to those that are falling ● Market resilience- market’s ability to adjust back to equilibrium following significant price changes Market Liquidity Market Breadth Market Resilience Market Depth
  10. 10. Other Factors ● Macroeconomic fundamentals ○ Fiscal policy ○ Exchange rate ○ Reserve ratio ■ Bank Liquidity Ratio= bank’s assets/ bank’s liabilities ■ If Fed decreases reserve requirement → US market liquidity increases
  11. 11. Current State of Liquidity ● People expect to easily be able to obtain a loan ● LIBOR- benchmark for interest rates on short term loans LIBOR’s upwards trend → making it more expensive for banks to borrow from each other → trickles down to consumers trying to obtain loans
  12. 12. Importance of Liquidity ● Economists are becoming concerned about potential for liquidity crunch as more and more stocks receive bearish predictions ● Liquidity Crunch- when demand for cash sources while supply is low leads to higher interest rates
  13. 13. ● I Know First uses an advanced machine learning algorithm to create daily market predictions for over 10,000 assets over 6 time horizons from 3 days to 1 year ● Subscribe today to get the latest forecasts
  14. 14. I Know First’s Plans To Forecast Liquidity ● I Know First is currently in the processing of implementing its algorithm to forecast liquidity of ○ Companies ○ Entire markets ● Using historical data, I Know First will be able to predict the cash shortages and which companies and industries will be more vulnerable ● Ability to predict liquidity crunches and warn subscribers
  15. 15. Learn more about I Know First at: iknowfirst.com Or read the full article on forecasting liquidity at: https://iknowfirst.com/know-first-future-risk-management-part-1-forecasting-liquidity
  16. 16. Image Sources ● Factors of Liquidity ○ http://www.picserver.org/l/liquidity.html ● Ripple Effect: ○ https://commons.wikimedia.org/wiki/File:Subprime_Crisis_Diagram_-_X1.png ● Others sourced in pictures or I Know First Premium Content