illiquid underlying at the market price. Bermudan-style return put option: right to put the option at a specified strike. Return swap: swap the underlying's return for LIBOR paid periodically. Return swaption: option to enter into the return swap. Liquidity option: "knock-in" barrier option, where the barrier is a liquidity metric. Case studies Amaranth Advisors LLC – 2006 Amaranth Advisors lost roughly $6bn in the natural gas futures market in September 2006. Amaranth had taken a concentrated, leveraged, and undiversified position in its natural gas strategy. Amaranth's positions were staggeringly large, representing around 10% of the global market in natural gas futures. Chincarini notes that firms need to manage liquidity risk explicitly. The inability to sell a futures contract at or near the latest quoted price is related to one's concentration in the security. In Amaranth's case, the concentration was far too high and there were no natural counterparties when they needed to unwind the positions. Chincarini (2006) argues that part of the loss Amaranth incurred was due to asset illiquidity. Regression analysis on the 3 week return on natural gas future contracts from August 31, 2006 to September 21, 2006 against the excess open interest suggested that contracts whose open interest was much higher on August 31, 2006 than the historical normalized value, experienced larger negative returns. Northern Rock – 2007 Northern Rock suffered from funding liquidity risk in September 2007 following the subprime crisis. The firm suffered from liquidity issues despite being solvent at the time, because maturing loans and deposits could not be renewed in the short-term money markets. In response, the FSA now places greater supervisory focus on liquidity risk especially with regard to "high-impact retail firms". LTCM – 1998 Long-Term Capital Management (LTCM) was bailed out by a consortium of 14 banks in 1998 after being caught in a cash-flow crisis when economic shocks resulted in excessive mark-to-market losses and margin calls. The fund suffered from a combination of funding and asset liquidity issues. The asset liquidity issue arose from LTCM's failure to account for liquidity becoming more valuable, as it did following the crisis. Since much of its balance sheet was exposed to liquidity risk premium, its short positions would increase in price relative to its long positions. This was essentially a massive, unhedged exposure to a single risk factor. LTCM had been aware of funding liquidity risk. Indeed, they estimated that in times of