Joshua White#88

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What is funding liquidity risk in trading?

Funding liquidity risk arises when traders or institutions cannot meet margin or collateral calls despite being solvent. For example, a leveraged hedge fund may have profitable long-term positions but is forced to liquidate due to short-term margin demands. In forex, this risk is acute because brokers demand daily mark-to-market margin. During crises, funding liquidity evaporates, forcing fire-sales and widening spreads. Institutions mitigate with diversified funding sources, repo lines, and central bank access. Retail traders manage it by keeping buffer capital, avoiding overleveraging, and monitoring margin levels closely. Funding liquidity crises often amplify volatility, as seen in 2008 and March 2020. Understanding this hidden risk explains why leverage kills accounts not by wrong ideas but by timing mismatches.