Explanation:
First, calculate the spread and mid-price:
Spread = $32.90 - $32.45 = $0.45.
Mid-price = ($32.90 + $32.45) / 2 = $32.675.
The Mean Proportional Spread (Spread Risk Factor) = Spread / Bid = $0.45 / $32.45 = 0.013867 (approx 0.0139).
Next, use the 99% confidence interval multiplier (Z = 2.33) and the sample standard deviation of 0.004 to find the upper bound of the proportional spread:
Max Proportional Spread at 99% = 0.013867 + (2.33 * 0.004) = 0.023187.
Finally, the 99% Confidence Interval Transaction Cost per unit = 0.5 * Mid-price * Max Proportional Spread = 0.5 * $32.675 * 0.023187 = $0.3788 (approx $0.379). Therefore, the correct set is Transaction Cost: $0.379 and Spread Risk Factor: 0.0139.
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Q.73 Bob Woolmer is a fund manager at Fortune Investment. He is analyzing shares of Bell Aviation which currently have a bid price of $32.45 and an ask price of $32.90. The sample standard deviation of this bid-ask spread is 0.004. Given this information, determine the 99 percent confidence interval on the transactions cost, in dollars per unit of the asset, and the 99% spread risk factor for a transaction involving Bell Aviation.
A
Transactions Cost: $0.759; Spread Risk Factor: 0.0232
B
Transactions Cost: $0.759; Spread Risk Factor: 0.0139
C
Transactions Cost: $0.378; Spread Risk Factor: 0.0116
D
Transactions Cost: $0.379; Spread Risk Factor: 0.0139
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