Explanation:
Using the constant spread approach,
LVaR = (V × Zₐ × σ) + (0.5 × V × spread)
Where:
V = asset (or portfolio) value
Zₐ = confidence parameter (Normal distribution)
σ = standard deviation of returns
LVaR = (40 × 1.65 × 0.01) + 0.5 × 40 × 0.02 = $1.06
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Q.2977 Suppose that XYZ Company has a current stock price of $40 and a daily standard deviation of 1%. The current bid-ask spread is 2%. Calculate LVaR at the 95% confidence level. Assume a constant spread.
A
0.2452
B
1.3526
C
1.0981
D
1.06
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