Explanation:
Correct Answer: B
Explanation: To calculate the 95.0% confident Liquidity-adjusted Value at Risk (LVaR) under stressed market conditions, we need to calculate the standard VaR and the stressed Cost of Liquidation.
$39.00 + $41.00) / 2 = $40.00$41.00 - $39.00) / $40.00 = $2.00 / $40.00 = 0.05 (or 5.0%),000,000 \times 8.3\% = \3`. Calculate the Normal Value at Risk (VaR):,000,000 \times 2.00\% \times 1.65 = \4`. Calculate LVaR:,000 + \83`,000 = \`149`,000$Thus, the nearest value is $149,000.
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A position with a value of $2.0 million consists of 50,000 shares of stock. The stock is quoted bid $39.00, offer $41.00. The bid-offer spread has a volatility of 2.0%. The stock’s daily volatility is 2.00% or 200 basis points. For purposes of value at risk (VaR), assume the stock’s arithmetic returns are normally distributed (aka, normal VaR) and the expected daily return rounds to zero (under these assumptions absolute VaR is identical to relative VaR). We want to measure the cost of liquidity under stressed market conditions; aka, we will assume a worst-case volatile spread rather than a static spread.
Which is NEAREST to the position’s one-day 95.0% confident liquidity-adjusted value at risk (LVaR)? (Please assume a rounded normal deviate of 1.65).
A
$76,300
B
$149,000
C
$318,000
D
$755,000
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