Explanation:
20.1.3. C. True: `$3`,240
The 95.0% confident worst expected spread for each position is given by:
,000 * (0.050 + 0.050 * 1.645) = \;,000 * (0.030 + 0.030 * 1.645) = \Total cost of unwinding with 95.0% confidence is therefore (3,306.25 + 3,174.00)/2 = \`3,240.13$, or about \$3`,240.
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20.1.3. An investor holds two positions:
$25,000 where the bid-offer spread has a mean and standard deviation of 0.050$40,000 where the bid-offer spread has a mean and standard deviation of 0.030If we assume the bid-offer spreads are normally distributed, then which is nearest to the worst expected cost of unwinding with 95.0% confidence?
A
$1,730
B
$2,950
C
$3,240
D
$6,500
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