Liquidity Risk Management Procedures

[Jasz]

Liquidity risk management procedures are the set of activities and processes used to reduce liquidity risk. Liquidity risk management is a combination of processes, policies, procedures and controls designed to minimize the loss from poor liquidity conditions. The aim of liquidity risk management is to ensure that the firm has sufficient cash or liquid assets available at all times to meet its liabilities.

Liquidity risk can be mitigated by:

Identifying and monitoring potential sources of liquidity risks

Using internal and external financial information to monitor liquidity requirements

Allocating liquidity risk capital across different trading entities using an appropriate mix of debt and equity instruments.

The procedures must ensure that the risks associated with the liquidity risk are managed effectively and consistently across all operations.

The procedures must be regularly reviewed and updated in line with changes to the business environment.

The procedures must be communicated clearly, both internally and externally, to ensure that all staff are aware of their responsibilities and accountabilities.

 

[Holicent]

Foreign exchange risk management procedures Is explained thus: The main objective of the foreign exchange risk management procedures is to minimize the risk of loss to the company in respect of its foreign currency exposure. The procedures should be reviewed at least annually by a person independent from the treasury function who has knowledge of the business operations and financial information.

The review should consider:

a) identification and classification of all foreign currency exposures;

b) estimation techniques for foreign currency exposures;

c) an assessment of the different methods available for hedging exposures against market risks; and

d) strategies for managing existing exposures.

Some firm try to ignore this or even pretend it doesn't exist, my question is how long? No matter how small your business or organization might be as far it involves money or you expect returns at the end of the day, in cash or kind, then you need to observe this process in your firm.