Liquidity and Solvency are altogether different. Do you agree? Discuss the types of liquidity risk.

Yes, Liquidity and Solvency are two different aspects. Solvency signifies the capability of the organization to pay its debt and dues. It represents the financial soundness of the organization. Whereas the liquidity risk arises due to mis-matches in the cash flow i.e. absence of adequate funds. Liquidity is altogether different from the word solvency. A firm may be in sound position as per the balance sheet, but if the current assets are not in the form of cash or near cash assets, the firm may not make payment to the creditors which adversely affect the reputation of the firm. Types of Liquidity Risk: The liquidity risk may be of two types, trading risk and funding risk. Trading Risk: It may mean the absence of the liquidity or enough products or securities etc to actually undertake buy and sell activities. e.g. in the context of securities trading inability to enter into derivative transactions with counter parties or make sales or purchase of securities. Funding Risk: It refers to the inability to meet the obligations e.g. inability to manage funds by either borrowing or the sale of assets/securities. It arises where the balance sheet of a firm contains illiquid financial assets which cannot be turned in to cash within a very short time.