This document discusses liquidity forecasting and management. It defines liquidity forecasting as predicting future cash flows to identify potential shortages or excesses. It also discusses different types of liquidity commitments, factors that affect liquidity like cash flows and management policies, and metrics for measuring liquidity like quick and current ratios. The document then covers market liquidity risks and how to measure a market's depth, breadth, and resilience. It notes concerns about potential liquidity crunches if bearish predictions increase. Finally, it describes I Know First's plans to forecast liquidity at the company and market level using historical data to predict vulnerabilities.

1. The Future of Risk Management
Part 1: Forecasting Liquidity

2. What is a liquidity
forecast?
● A prediction of a company or market’s cash flows at some future point in
time
● Allows companies to
○ pinpoint potential times that available sources of credit would not be
able to cover cash shortages
○ identify if there is an excess of liquid assets which can then be utilized
for other initiatives
● Uses past cash forecasts to predict future

3. Cash Forecasts
Cash
Forecasts
Capital
Budgets
Cash
History
Operating
Budgets
Business
Units

4. Types of
Liquidity
● Committed
○ Assets that have already been promised and will not be taken away
under any circumstances
○ Clearly defined terms between lender and borrower
● Uncommitted
○ Agreement between lender and borrower to make short term funding
available if necessary
○ No clearly defined terms
● In times of volatility, uncommitted liquidity may be decreased significantly
whereas committed liquidity will stay stable

5. Factors of
Liquidity
● Cash Flow- difference between inflows and outflows for a company
○ Liquidity drag- cash inflow is either reduced or delayed
○ Liquidity pull- cash outflow increases
● Management policies and control of cash flow
○ More risk averse company → more likely to have liquid cash balance
● Ability to raise cash
○ If company canis increase its cash without taking a loan→ it is more
likely to invest more of its cash flow.

6. Measuring Liquidity
Short Term- Quick Ratio
Cash + Cash Equivalents + Short Term Investments + Current Receivables
Current Liabilities
Quick Ratio =
Long Term- Current Ratio
Current Assets
Current Liabilities
Current Ratio =

7. A Macro Picture:
Market Liquidity
● Market Liquidity- ease at which market participants can buy or sell assets
with minimal cost, risk, or inconvenience
● Market liquidity risk- loss that occurs when a trade is made at a non-
equilibrium price
● In general, market liquidity refers to a market’s depth, breadth, and
resilience in combination with time.

8. Measuring Market Liquidity
● 4 main inputs
○ Transaction cost
○ Volume
○ Equilibrium price
○ Market impact
● Presence of dark pools where large volumes of stock change hands
obscures the real values → more accessible substitutes are market’s depth,
breadth, and resilience.

9. Measuring Market Liquidity
● Market depth- change in volume
of transactions based on a change
in price
● Market breadth- number of stocks
that are rising in comparison to
those that are falling
● Market resilience- market’s ability
to adjust back to equilibrium
following significant price changes
Market
Liquidity
Market
Breadth
Market
Resilience
Market
Depth

10. Other Factors
● Macroeconomic fundamentals
○ Fiscal policy
○ Exchange rate
○ Reserve ratio
■ Bank Liquidity Ratio= bank’s
assets/ bank’s liabilities
■ If Fed decreases reserve
requirement → US market liquidity
increases

11. Current State of
Liquidity
● People expect to easily be able to obtain a loan
● LIBOR- benchmark for interest rates on short term loans
LIBOR’s upwards trend → making it more expensive for banks to borrow
from each other → trickles down to consumers trying to obtain loans

12. Importance of Liquidity
● Economists are becoming
concerned about potential for
liquidity crunch as more and more
stocks receive bearish predictions
● Liquidity Crunch- when demand for
cash sources while supply is low
leads to higher interest rates

13. ● I Know First uses an advanced machine learning algorithm to create daily
market predictions for over 10,000 assets over 6 time horizons from 3 days to
1 year
● Subscribe today to get the latest forecasts

14. I Know First’s Plans To Forecast
Liquidity
● I Know First is currently in the processing of implementing its
algorithm to forecast liquidity of
○ Companies
○ Entire markets
● Using historical data, I Know First will be able to predict the
cash shortages and which companies and industries will be
more vulnerable
● Ability to predict liquidity crunches and warn subscribers

15. Learn more about I Know First at:
iknowfirst.com
Or read the full article on forecasting liquidity at:
https://iknowfirst.com/know-first-future-risk-management-part-1-forecasting-liquidity

16. Image Sources
● Factors of Liquidity
○ http://www.picserver.org/l/liquidity.html
● Ripple Effect:
○ https://commons.wikimedia.org/wiki/File:Subprime_Crisis_Diagram_-_X1.png
● Others sourced in pictures or I Know First Premium Content