▪ Exercises
Q1
A DI has the following balance sheet (in millions):
Assets
Liabilities and Equity
Cash
$20
Deposits
$100
Loans
85
Borrowed funds
35
Securities
45
Equity
15
Total assets
$150
Total liabilities and equity
$150
Customer decides to exercise a $10 million loan commitment. How will the new balance sheet
appear if the DI uses the following liquidity risk strategies?
a. Stored liquidity management: decrease the amount of the cash on the asset side of the balance
sheet.
b. Purchased liquidity management: increase the borrowed funds on the liability side of the balance
sheet.
a. When stored liquidity management is used:
Assets
Liabilities and Equity
Cash
$10
Deposits
Loans
95
Borrowed funds
Securities
45
Equity
Total assets
$150
Total liabilities and equity
b. When purchased liquidity management is used:
Assets
Liabilities and Equity
Cash
$20
Deposits
Loans
95
Borrowed funds
Securities
45
Equity
Total assets
$160
Total liabilities and equity
$100
35
15
$150
$100
45
15
$160
Q2
To help finance the takeover, company XYZ will liquidate its following portfolio. The weight, fire
sale and fair market price of the assets that will be liquidated are given below. Calculate the
liquidity index for these securities.
Asset Weight
Fire sale price
Fair market price
stock
1/2
$8,700
$9,800
bonds
1/6
$2,800
$3,900
Treasury 1/3
$12,000
$13,500
Solution:
I
1
2
8700
9800
1
6
2800
3900
1
3
12000
13500
0.8598