Explanation:
Cost of liquidation (stressed market) =
= \`$49.41`5 \text{ million}In this question, we are considering the mean and standard deviation for the proportional bid-offer spread for both shares and the commodity, bearing in mind that .
Additionally, is the mid-market position, represents the mean for the proportional bid-offer, represents the constant factor given as 1.645 at 95% confidence level, and the represents the standard deviation for the propositional bid-offer spread.
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Q.3941 Suppose that a bank invests in shares and a commodity whose mid-market position is $1,400 million, and $840 million respectively. You are also provided with the following information:
| Mean | Standard Deviation | |
|---|---|---|
| Bid-offer spread for the shares | $1.0 million | $1.1 million |
| Bid-offer spread of the commodity | $0.1 million | $0.1 million |
| Proportional bid-offer spread for the shares | 0.034 | 0.018 |
| Proportional bid-offer spread for the commodity | 0.0044 | 0.0044 |
Assuming the distribution of the spreads is normal, calculate the cost of liquidation in a stressed market at a 95% confidence level.
A
$40.10 million
B
$50.23 million
C
$49.42 million
D
$107.93 million
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