1.Liquidity risk is the risk that:
　　I. The markets get less active, making it difficult to exit
　　II. The offices get flooded
　　III. It becomes difficult to borrow money
　　IV. The process for settlement becomes less smooth
　　A. I and II
　　B. II and III
　　C. I and III
　　D. I and IV
　　2.Which one ofthe following statements about contract netting is not correct?
　　A. By reducing the number and overall value of payments betwecn financial institutions, netting can enhance the efficicncy of na1ional payment systems and reduce settlement costs associated with the large and growing volume of foreign exchange transactions.
　　B. Netting can also contribute to an increase in systemic risk if, instead of achieving reductions in participants' true exposures, it merely obscures the level of exposures.
　　C. Netting can reduce the size of credit and liquidity exposures incurred by market participants and, thereby, contribute to the containment of systemic risk.
　　D. Netting provides for effective reduction in credit exposures because of the certainty provided by contract law throughout the wor1d.
　　3.The following statements compare a highly liquid asset against an (otherwise similar) illiquid asset. Which statement is most likely to be false?
　　A. It is possible to trade a larger quantity of the liquid asset without affecting the price.
　　B. The liquid asset has a smaller bid-ask spread.
　　C. The liquid asset has higher price volatility since it trades more often.
　　D. The liquid asset has higher trading volume.
　　Answer:
　　1.C
　　Funding risk (choice 111) and trading-related risk (choice 1) are two types of liquidity risks.
　　2.D
　　Statement D is not correct. Netting agreements are not universally recognized or entorceable.
　　3.C
　　A liquid asset has a smaller bid-ask spread, higher trading volume, less price impact from a large trade, but not necessarily higher volatility than an otherwise comparable illiquid asset.