What does 'constrained optimisation' in the context of liquidity management refer to?
A)It refers to the case that any liquid asset holdings over and above the reserve requirements imposed by regulators need to be balanced by the same amount of short-term liabilities.
B)It refers to the case that any increases in an FI's current liability holdings incur a decrease in the profitability of the FI's liquidity holdings.
C)It refers to the case that any liquid asset reserve requirements imposed by regulators set a minimum bound on the level of liquid reserve assets in the balance sheet.
D)It refers to the case that any liquid asset reserve requirements imposed by regulators need to be balanced by the same amount of short-term liabilities.

Question

Quizplus · Accepted Answer

Constrained optimisation in liquidity management refers to the case where any liquid asset reserve requirements imposed by regulators set a minimum bound on the level of liquid reserve assets in the balance sheet. This means that financial institutions cannot simply maximize their profits by decreasing their liquid asset holdings below the required minimum. They must balance their desire for profit with the need to maintain sufficient liquidity to meet regulatory requirements.

What Does 'Constrained Optimisation' in the Context of Liquidity Management