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Q.3881 Suppose a company traded at an ask price of $335 and a bid price of $331. The sample standard deviation of the spread is 0.00019. Calculate the expected transaction cost following the zero mean normality assumption and 95% confidence interval on the transaction cost. | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

Expected transaction cost = $P \times \frac{1}{2} (s + \lambda (\text{standard deviation of spread}))$

Midprice ( $P$ ) = $\frac{335 + 331}{2} = 333$

$s = \frac{\text{ask price - bid price}}{\text{midprice}} = \frac{335 - 331}{333} = 0.0120$

Expected transactions cost = $333 \times \frac{1}{2} (0.0120 + 1.65(0.00019)) = 2.05 $

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Q.3881 Suppose a company traded at an ask price of `$335` and a bid price of `$331`. The sample standard deviation of the spread is 0.00019. Calculate the expected transaction cost following the zero mean normality assumption and 95% confidence interval on the transaction cost.

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