Liquidity Options

Posted: 21 May 2019

See all articles by Maxim Golts

Maxim Golts


Mark Kritzman

Windham Capital Management; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: April 5, 2010


The financial crisis of 2007-2009 highlighted the importance of liquidity to many investors. University endowment funds, for example, were forced to sell publicly traded securities at substantially depressed values in order to meet funding commitments to private investments. Hedge funds engaged in fire sales of publicly traded securities to meet margin calls from lenders and redemption demands from clients. And financial institutions faced with capital calls sold assets at substantial discounts to their government guaranteed values. Investors could guard against these capital calls by maintaining a reserve of highly liquid securities, but this protection would require them to sacrifice the expected return premium of less liquid investments. We propose, as an alternative, that investors consider purchasing liquidity options to meet unscheduled capital calls. We describe how to structure and price liquidity options, and we demonstrate how the price discovery process of liquid securities determines the fair value of illiquid securities.

Keywords: liquidity, option, volatility, bid-offer spread, hedge funds, private equity

JEL Classification: G12, G13, G23

Suggested Citation

Golts, Maxim and Kritzman, Mark, Liquidity Options (April 5, 2010). Journal of Derivatives, Vol. 18, No. 1, 2010,, Revere Street Working Paper Series No. 272-27, Available at SSRN: or

Mark Kritzman

Windham Capital Management ( email )

One Federal Street
21st Floor
Boston, MA 02110
United States
6174193900 (Phone)
6172365034 (Fax)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

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