Question

Comment on the first risk measurement tool you would use and why for any two of the following:

* Short term liquidity risk

* Long term solvency risk

* Credit risk

* Bankruptcy risk.

Answer 1

Short Term Liquidity Risk:

The first risk measurement tool I would use for Short term liquidity risk is Current Ratio.

Current Ratio is the ratio of current assets to current liabilities.

Current assets are short term assets that can be converted into cash in less than a year. Current Liabilities are liabilities that need to be liquidated in less than a year

Long Term Liquidity Risk

The first risk measurement tool I would use for Long  term liquidity risk is Solvency Ratio.

Solvency ratio =(Net Income +Non Cash Expenses)/(Short term liabilities+Long Term Liabilities)