What financial strategy is often adopted to mitigate liquidity risk?

What financial strategy is often adopted to mitigate liquidity risk?

• A. Holding long term bonds
• B. Establishing a line of credit
• C. Investing solely in real estate
• D. Consolidating debts

Answer: (B)

Establishing a line of credit is a financial strategy commonly employed to mitigate liquidity risk. This approach allows businesses or individuals to access funds quickly when needed, ensuring they can cover short-term obligations without having to liquidate other assets or face cash flow issues. A line of credit offers flexibility, as borrowers can draw on it as necessary and repay it over time, maintaining a healthy liquidity position. In contrast, holding long-term bonds may not provide immediate access to cash, as they typically take longer to liquidate. Investing solely in real estate can lead to liquidity challenges, as real estate transactions can be time-consuming and are not always easily convertible to cash. Consolidating debts may improve cash flow management but doesn't directly address liquidity risk or guarantee immediate access to cash when needed. Thus, establishing a line of credit is a proactive step in ensuring liquidity is maintained.

Establishing a line of credit is a financial strategy commonly employed to mitigate liquidity risk. This approach allows businesses or individuals to access funds quickly when needed, ensuring they can cover short-term obligations without having to liquidate other assets or face cash flow issues. A line of credit offers flexibility, as borrowers can draw on it as necessary and repay it over time, maintaining a healthy liquidity position.

In contrast, holding long-term bonds may not provide immediate access to cash, as they typically take longer to liquidate. Investing solely in real estate can lead to liquidity challenges, as real estate transactions can be time-consuming and are not always easily convertible to cash. Consolidating debts may improve cash flow management but doesn't directly address liquidity risk or guarantee immediate access to cash when needed. Thus, establishing a line of credit is a proactive step in ensuring liquidity is maintained.