Financial Risk Manager Part 2

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Explanation:

First, calculate the standard VaR:\nUsing $\\alpha = 0.95$ , the corresponding Z-score is approximately 1.645.\n $\\sigma = \\frac{0.49}{\\sqrt{490}} = \\frac{0.49}{22.136} \\approx 0.022136$ \n $VaR = Z \\times \\sigma = 1.645 \\times 0.022136 \\approx 0.0364$ \n\nNext, calculate the liquidity cost using the constant spread approach:\n $Liquidity\\ Cost\\ (LC) = 0.5 \\times spread = 0.5 \\times 0.02 = 0.01$ \n\nThe increase in VaR due to the liquidity adjustment is:\n $\\frac{LC}{VaR} = \\frac{0.01}{0.0364} \\approx 0.2747$ or $27.47\%$\n\nTherefore, the liquidity adjustment raises the VaR by almost 27%.

Explanation:

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Q.59 A financial manager wishes to estimate the liquidity-adjusted VaR using the constant spread approach. She gathers the following data:\n\n $\\mu = 0, \\sigma = \\frac{0.49}{\\sqrt{490}}, \\text{spread} = 0.02, \\alpha = 0.95$ \n\nBased on these data, which of the following statements is true? Please click here if you want to use the standard normal table

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Last updated: July 5, 2026 at 07:03

The constant spread liquidity adjustment raises the VaR by almost 27%

The constant spread liquidity adjustment reduces the VaR by 28%

A small spread cannot translate into a large liquidity adjustment to the VaR

The constant spread liquidity adjustment raises the VaR by 50%