Explanation:
Let the value of the standard deviation for the proportional bid-offer spread for shares be w.
The cost of liquidation under stressed market conditions at a 99% confidence level can be calculated using the following formula:
= \frac{1,426 \times (0.0467 + 2.326 \times w)^2}{2} + \frac{814 \times (0.006857 + 2.326 \times 0.006857)^2}{2} = \`$82.26`4 \Rightarrow 33.2971 + 1,658.438w + 9.2822 = \`$82.26`4 \Rightarrow 1,658.438w = \`$39.68`47Ultimate access to all questions.
Q.3942 Fatou James, the liquidity manager for CPQ bank, invests in shares and a commodity whose mid-market value of the positions are 1,426, and 814 respectively. The mean and standard deviation of the position in shares are $1.12 and $1.45, respectively. Suppose that the mean and standard deviation for the commodity are both $0.63, and the mean for the proportional bid-offer spread for the shares is 0.0467, while the standard deviation for the proportional bid-offer spread for the shares is unknown. Given that the mean and standard deviation for the proportional bid-offer spread for the commodity are both 0.006857. Assume that the distribution of the spreads is normal. Further, the cost of liquidation under a stressed market condition at a 99% confidence level is 82.264. Calculate the standard deviation for the proportional bid-offer spread for shares.
A
0.063
B
0.048
C
0.056
D
0.0239
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