Define Illiquidity Premium and Explain Why It Would Be Used

question 44

Essay

Define illiquidity premium and explain why it would be used.

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Definitions:

Safety Stock

Additional inventory held to protect against stockouts caused by variability in supply or demand.

Single-Period Model

A decision-making framework used in inventory management for ordering and stocking products that have a one-time demand.

EOQ

Economic Order Quantity, a formula used to determine the optimal order size that minimizes the total costs of inventory, including holding and ordering costs.

Stockout Risk

Refers to the possibility that inventory levels will fall to zero, leading to a situation where customer demands cannot be fulfilled.