[MUSIC] Hello, I'm Carolina Moura-Alves and I work for UBS Wealth Management. I'm the Head of Fixed Income Strategies. Today I would like to talk to you about illiquidity in a risk management context. When we analyze different investment opportunities, be it bonds, equities, hedge funds, a key consideration is the liquidity of the specific investment. What we mean by that is that we must always ask ourselves the questions. If I want to sell my bonds, equity, etc., how quickly can I do it? Furthermore, will the price be impacted by the fact that I want to sell? If the answer to both question is respectively, very quickly and no price impact, then investment is very liquid. Conversely if the answer is the opposite, then the investment illiquid. The ability to sell an investment quickly and without price impact is usually very valuable to investors, which is why, in financial markets, we often talk of the illiquidity premia and illiquidity risk. The illiquidity premia is the additional investment return we as investors demand as compensation for assuming illiquidity risk. And the illiquidity risk is, as the name indicates, the risk that the particular investment will turn out to be more illiquid than investors anticipate. An example of such a scenario is the period during the global financial crisis in 2008, 2009. When corporate bonds which investors have traditionally assumed to be liquid, proved to be anything but. Now why would investors ever assume illiquidity risk? Because illiquidity risk often translate into higher expected returns on the investment. Remember, illiquidity premia which comes with the compensate investors for your illiquidity risks. However, it is essential investors manage the illiquidity risk appropriately and do not introduce what we call liquidity mismatches in their portfolios. For example, suppose I have cash and I'm looking for an investment opportunity for the next 12 months. And that after 12 months, I want to sell my investment to buy a house, a car, something else. It would be very unwise to put the cash in investments, which cannot be sold or liquidated in the next five years. It would not help me at all with my stated goal of buying the house or the car in the 12 months. This time arising in compatibility between the 12 months and the 5 years is what we call liquidity mismatch, and it's a crucial focus of risk management in an investment context. I hope I showed you the role illiquidity plays in a portfolio context and the importance of managing the associated risks appropriately. Thank you for listening. [MUSIC]