From the course: Finance Foundations: Risk Management

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The cost of financial risk management solutions: Liquidity and volatility

The cost of financial risk management solutions: Liquidity and volatility

From the course: Finance Foundations: Risk Management

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The cost of financial risk management solutions: Liquidity and volatility

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- There are four factors that determine the cost of a financial risk management solution: standardization, time, liquidity and volatility. I've covered standardization and time in another video and they're pretty straightforward, but liquidity and market volatility are two other important parts of pricing and they're a bit more complicated. First there's liquidity in the market, or how easy it is to transact and there's market volatility, which represents how big the swings are in a given market, both up and down. So let's talk a bit more about these two factors and how they're related. Markets that have more transactions and more market participants are said to be more liquid, and that makes it less expensive to trade in those kinds of markets. For example, US dollars are more liquid to trade than British pounds, and British pounds or more liquid than Polish złoty. The more liquid a market, the less expensive the…

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