Question 1 (26 marks)

(a) Explain purchased liquidity approach in liquidity management and point out 2 advantages of that

approach. (10 marks) (b) Explain stored liquidity approach in liquidity management and point out 2 advantages of that

approach. (10 marks) (c) An FI has 2 kinds of assets: 60% in 1 month T-bill and 40% in 1 month consumer loan. In a month, the T-bill will yield $100, but now it worths only $97. The consumer loan will yield $88 in a month, but now it is worth $76. Calculate the 1 month liquidity index. (2 marks)

1. (d)Refer to (c), if the market conditions change suddenly and the T-bill now worths $98, while the
2. consumer loan worths $72. Calculate the new 1 month liquidity index. (2 marks)
3. (e)Based on the results from (c) and (d), interpret the liquidity risk faced by the FI before and after the

market conditions change.