FRM II-mock

anbu.edu
Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

FRM II-mock

Postby anbu.edu » Fri Oct 24, 2014 8:00 am

A hedge fund has invested fund worth USD 1 Million in shares .The weekly return of the share has
volatility of 1%. The bid ask Spread is averaged at 0.20. What is 95% liquidity adjusted daily VaR
for this position using constant spread approach if the current priceof the shares is USD50 each
Select one:
a. 23100
b. 18500
c. 9379
d. 7379
The correct answer is C.
VaR = 1.65 x 0.01 /sqrt(5) x 1000,000=7379
(Weekly VaR converted to daily VaR by dividing by sqare root of 5 )
Liquidity cost = 1000000 x 0.5 x0.20/50 = 2000
(VaR + LC ) = 7379 + 2000 = 9379
Reference: Chapter 3: Estimating Liquidity Risk; Measuring Market Risk by Kewin Dowd.
The correct answer is: 9379.

My doubt is why we are dividing .2 /50?

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

FRM II-mock

Postby edupristine » Thu Oct 30, 2014 9:48 am

W know that Liquidity Cost =0.5*Spread= 0.5*0.20 We have divided by 50 which is the price per share.

anbu.edu
Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

Postby anbu.edu » Thu Oct 30, 2014 3:30 pm

My question is why we are dividing it my price


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