The expected transaction cost including liquidity risk is calculated as: $Cost = \frac{1}{2} \times \text{Mid-price} \times \left( \frac{\text{Spread}}{\text{Mid-price}} + Z \times \sigma \right)$

Given:

• Bid = $199
• Ask = $200
• Mid-price = $\frac{200 + 199}{2} = 199.5$
• Spread = $200 - 199 = 1$
• Spread % = $\frac{1}{199.5} = 0.0050125$
• $\sigma = 0.0004$
• $Z$ for a 99% confidence level (one-tailed) is approximately $2.326$.

$Cost = \frac{1}{2} \times 199.5 \times (0.0050125 + 2.326 \times 0.0004)$ $Cost = 99.75 \times (0.0050125 + 0.0009304) = 99.75 \times 0.0059429 \approx 0.5928$

This value is closest to 0.5927.