Answer: USD 206,955

## Explanation **Correct Answer: C (USD 206,955)** The cost of liquidation in a stressed market scenario is calculated using the formula: \[ \text{Liquidation Cost} = 0.5 \times \text{Mid Price} \times \text{Position Size} \times (\mu_s + z \times \sigma_s) \] Where: - Mid Price = (Bid + Ask)/2 = (53.5 + 54.5)/2 = USD 54 - Position Size = 100,000 shares - μ_s = mean proportional bid-offer spread = 0.0185 - σ_s = standard deviation of proportional bid-offer spread = 0.0250 - z = z-score for 99% confidence level = 2.326 \[ \text{Liquidation Cost} = 0.5 \times 54 \times 100,000 \times (0.0185 + 2.326 \times 0.025) \] \[ = 0.5 \times 54 \times 100,000 \times (0.0185 + 0.05815) \] \[ = 0.5 \times 54 \times 100,000 \times 0.07665 \] \[ = 0.5 \times 5,400,000 \times 0.07665 \] \[ = 2,700,000 \times 0.07665 \] \[ = \text{USD 206,955} \] **Why other options are incorrect:** - **A (USD 49,950)**: This is the cost in a normal market scenario (without the stress component) - **B (USD 99,900)**: This incorrectly omits the 0.5 factor in the normal market calculation - **D (USD 413,910)**: This incorrectly omits the 0.5 factor in the stressed market calculation The 0.5 factor accounts for the fact that liquidation cost represents half the bid-ask spread, as the position will be liquidated at the bid price when selling.

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