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Explanation:
Correct Answer: C
Explanation: To calculate the 99.0% confident Liquidity-adjusted Value at Risk (LVaR), we must sum the Normal Value at Risk (VaR) and the Cost of Liquidation (COL).
Calculate the Proportional Bid-Offer Spread ():
$29.00 + $31.00) / 2 = $30.00$31.00 - $29.00) / $30.00 = $2.00 / $30.00 = 0.066667 (or 6.6667%)Calculate the Cost of Liquidation (COL):
,000,000 \times 0.066667 = \3`. Calculate the Normal Value at Risk (VaR):,000,000 \times 1.43\% \times 2.33 = \ (Rounds to \`100`,000$)Calculate LVaR:
,000 + \100`,000 = \`200`,000$Therefore, the nearest value is $200,000.
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A portfolio holds 100,000 shares of a stock and this single position has a value of $3.0 million. The stock is quoted bid $29.00, offer $31.00. The stock's daily volatility is 1.43% or 143 basis points. For purposes of value at risk (VaR), we will 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). Which is NEAREST to the position’s one-day 99.0% confident liquidity-adjusted value at risk (LVaR)?
A
$15,000
B
$80,000
C
$200,000
D
$1.0 million