Liquidity Risk

Liquidity Risk is the financial exposure arising from the inability to execute a transaction in the market quickly and at a price close to the prevailing market price, or the inability of a firm to meet its short-term cash flow obligations without incurring unacceptable losses. This risk is particularly acute in the Foreign Exchange (FX) market, where sudden drops in trading volume can cause bid-ask spreads to widen dramatically, leading to increased transaction costs and potential slippage.