QUESTION ONE $(20$ Marks$)$

Below is the information extracted from Cash Management Bank Zambia Limited

Best liquidity outcome is estimated at a probability of $10\%,$ Average liquidity outcome is estimated at a probability of $55\%.$ The estimated probability for the worst outcomes is not yet established.

In the coming month the bank estimates Deposit to be $K3200$ as the best outcome, $K2800$ as the average outcome and K$2400$ as the worst outcome. It is also estimated for loans that K$2000$ will be the best outcome, K$2600$ as the average outcome and K$2800$ as the worst outcome.

Required

a$)$ Explain the difference between Funding Liquidity Risk and Market Liquidity Risk.

$[10$ Marks$]$

b$)$ If the Expected Liquidity Position in the coming month is a Surplus of $K1,500,$ compute the probability for the worst outcomes $[10$ Marks$]$