Monitoring liquidity


The identification and taxonomy of the cash flows that can occur during the business activity of a financial institution is crucial to building effective tools to monitor and manage liquidity risk.

Many classifications have been proposed (see, amongst others, [86]; a good review is [107]). The taxonomy we suggest, not too different from the others just mentioned, focuses on two main dimensions: time and amount; it is sketched in Figure 6.1. Like any other classification, this one also depends on the reference point of view. More specifically, in our case, we classify cash flows by considering them from a certain point in time; for example, cash flows may fall in one of the categories we will present below when we look at them from, say, today's point of view of. They can also change category when we shift the point of view in some other date in the future.

The first dimension to look at, when trying to classify future cash flows, is time: cash flows may occur at future instants that are known with certainty at the reference time (e.g., today), or they may manifest themselves at some random instants in the future. In the first case we say that, according to the time of their appearance, they are deterministic. In the second case we define them as stochastic (again, according to time).

The second dimension to consider is the amount: cash flows may occur in an amount that is known with certainty at the reference time, or alternatively ...

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