Financial risk management solution costs - Liquidity and volatility

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Four critical factors impact the price of risk management solutions.

1. Stardadisation
2. Time
3. Liquidity
4. Market Volatitlity

For the first half see [[Standardisation and time]]

Liquidity

How easy it is to transact in the market because of how many participants and cash there is in the market. e.g. US dollars vs Polish cash.

Less liquid markets imply more volatility.

Populated markets are deep markets

Def: Bid-Ask Spread

• Difference between what buyers are willing to pay (bid) and what sellers are willing to accept (ask)

Volatility

When the bid-ask spreak is wide or the the market is shallow, the volatility of the market is naturally higher, meaning more risk as heding becomes more expensive.