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Liquidity risk and Option pricing theory

Explain these financial theories.

Liquidity risk and Option pricing theory.

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Liquidity risk

Liquidity risk simply represents the potential that an institution will be unable to meet its obligations as they come due because of the inability to liquidate assets or obtain adequate funding or that it cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. This risk also tends to compound other risks. For example if an organization has a position in an illiquid asset, its limited ability to liquidate that position at short notice will compound its market risk. So liquidity risk has to be managed in addition to market, credit and other risks. There are no comprehensive measures of liquidity risk. However there are certain techniques of asset-liability management ...

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Liquidity risk and Option pricing theory are featured topics.