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Q.3882 Suppose Delight Inc. traded at an ask price of $200 and a bid price of $199. The sample standard deviation of the spread is 0.0004. Calculate the 99% spread risk factor for the transaction. | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

The 99% confidence interval of transaction cost in dollars, i.e., 99% spread risk factor is expressed as:

\pm P \times \frac{1}{2}(s + 2.33\sigma_s)

and

99\% \text{ spread risk factor} = \frac{1}{2}(s + 2.33\sigma_s)

\text{mid market price} = \frac{\text{ask} + \text{bid}}{2} = \frac{200 + 199}{2} = 199.5

and,

s = \frac{\text{ask} - \text{bid}}{\text{mid market price}} = \frac{200 - 199}{199.5} = 0.00501

Thus,

99\% \text{ spread risk factor} = \frac{1}{2}(0.00501 + 2.33(0.0004)) = 0.00297

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Q.3882 Suppose Delight Inc. traded at an ask price of `$200` and a bid price of `$199`. The sample standard deviation of the spread is 0.0004. Calculate the 99% spread risk factor for the transaction.