What situation best describes liquidity risk?

Liquidity risk refers to the potential difficulty an entity or individual might face when trying to sell an asset quickly without having to accept a lower price than its fair market value. When liquidity is low, there may be a lack of buyers for certain assets, which can force the seller to sell at a discount or incur a loss. In this context, the inability to sell an asset quickly without incurring a loss perfectly illustrates liquidity risk, as it highlights the challenges surrounding turning assets into cash when needed.

Selling an asset at a profit does not address the concerns of liquidity. Instead, it suggests that there are sufficient buyers and favorable market conditions. Defaulting on a loan obligation relates more directly to credit risk rather than liquidity risk, as it concerns the borrower's ability to meet debt obligations. High volatility in the market indicates rapid price changes but does not specifically define liquidity risk; it represents a broader risk of market fluctuations that can affect asset values but does not directly relate to the ease of selling assets without incurring losses.