A hedge fund “ABC” has the following assets:
Asset Value Asset Value
Cash 100 Stocks 2000
Treasury Bills 100 Checkable Deposits 100
Asset-backed Commercial Papers (ABCP) 2000 Agency Mortgagebacked securities (Agency MBS) 2000
Fixed Assets 2000 Time Deposits 500
a. Based on the maturity of the financial instrument, which above items belong to the money market? Which items are in the capital market?
b. Based on the liquidity, which items are in M1? Which items are in M2?
c. Let “highly liquid” be the category including all items in M2 as well as all the financial instruments in the money market, plus agency MBS.
Assume that short-term debt of this company is 4000. Does this company have enough liquidity? Explain in detail.
d. Assume ABCP and agency MBS are suddenly not considered as liquid assets anymore (due to the financial crisis), does this company have enough liquidity to pay its short-term debt? Explain in detail.