Question

Several years ago, Chelsea was given a painting by a famous artist. She planned to keep it as an investment, hoping its value would increase so that she could sell it and make a profit. Several years later, Chelsea had costly emergency surgery, and she did not have enough money in her savings to pay for the procedure. Fortunately, the painting had substantially increased in value, and she decided to sell it. She found a reputable art dealer who told her that market conditions would make it difficult to sell the painting for its full value in the next six months. Chelsea needed the money immediately, so the art dealer offered to buy the painting at a deep discount.

How would you describe the financial risk that Chelsea faces?

a. risk of default
b. risk of liquidity
c. risk of inflation
d. risk of deflation

Answer 1

Chelsea faces a liquidity risk, meaning she can't sell her painting for full value quickly due to needing immediate cash for emergency surgery. The financial risk that Chelsea faces in this situation is the risk of liquidity. Liquidity refers to the ability to quickly convert an asset into cash without incurring a significant loss.

Step-by-step explanation:

The financial risk that Chelsea faces can be described as a risk of liquidity. Liquidity risk is the danger that she will not be able to quickly sell the painting at its full value when she needs the cash for her emergency surgery. This issue of turning assets into cash swiftly is particularly problematic with tangible assets like art, which generally require more time and effort to sell, impacting her ability to achieve the full market price due to her immediate need for funds.

Answer 2

Chelsea faces the risk of liquidity, which means she cannot sell her painting quickly at its full value and has to sell it at a deep discount.

Step-by-step explanation:

The financial risk that Chelsea faces in this situation is the risk of liquidity. Liquidity refers to the ability to quickly and easily convert an investment into cash without a significant loss in value. In Chelsea's case, the painting's increased value doesn't help her immediate need for money because she cannot sell it quickly at its full value due to market conditions. As a result, she is forced to sell it at a deep discount, risking a loss of potential profit.