1.
The Future of Risk Management
Part 1: Forecasting Liquidity

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.
Cash Forecasts
Cash
Forecasts
Capital
Budgets
Cash
History
Operating
Budgets
Business
Units

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.
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.
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.
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.
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.
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.
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.
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.
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.
● 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.
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.
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.
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