Which one of the following statements about liquidity risk in derivatives instruments is not true?
A. Liquidity risk is the risk that an institution may not be able to, or cannot easily, unwind or offset a particular position at or near the previous market price because of inadequate market depth or disruptions in the marketplace.
B. Liquidity risk is the risk that the institution will be unable to meet its payment obligations on settlement dates or in the event of margin calls.
C. Early termination agreements can adversely impact liquidity because an institution may be required to deliver collateral or settle a contract early, possibly at a time when the institution may face other funding and liquidity pressures.
D. An institution that participates in the exchange-traded derivatives markets has potential liquidity risks associated with the early termination of derivatives contracts.
Answer:D
Each of the situations in A, B and C refers to either liquidity or funding difficulty due to liquidity.
D is not correct because exchange-traded derivatives are marked-to-market daily. An early termination of a derivative contract would not require any more funding than the daily mark-to-market actions.

 
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