Help with understanding - Liquidity Risk CFAI Reading 25 EOC 4

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  • I have trouble understanding the 2nd part. What’s the liquidity risk for the buyer to purchase a stock with limited float? Does that mean you have pay premium to get the stock, which is the price concession. So the price concession is the liquidity risk for the buyer?

you borrow stock,

then sell it,

keep the cash (do w/e you want)

contract is over, now you need to buy back the stock.

O Oh. you can’t buy back the stock because it’s illiquid… now you have to pay huge fees for failing to deiliver back the stock or pay out the wazoo to return the stock you borrowed.

Good example,thanks AlmostDoneIII.

I’m wondering, based on the answers for EOC #2 below, shall we consider concession in price = liquidity risk?

Liquidity risk, because of the possibility that Ford’s funding sources may be reduced or become unavailable and Ford may then have to sell its securities at a short notice with a significant concession in price