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Which of the following statements regarding liquidity risk in correct ? Explain why Asset liquidity risk arises when a financial institution cannot meet payment obligations.

  1. Which of the following statements regarding liquidity risk in correct? Explain why
    1. Asset liquidity risk arises when a financial institution cannot meet payment obligations.
    2. Flight to quality is usually reflected in a decrease in the yield spread between corporate and government debt issuances.
    3. Yield spread between on-the-run and off-the-run securities mainly captures the liquidity premium.
    4. Funding liquidity risk can be managed by setting limits on certain asset markets or products and by means of diversification.

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