FRM二级《操作及综合风险管理》Consider a 1,000 share position in an underv

Consider a 1,000 share position in an undervalued butt illiquid stick FGB, which has a current stock price of EUR 45 (expressed as the midpoint of the current bid-ask spread)。

The daily return for FGB has an estimated volatility of 0。30%。 the average bid-ask spread is EUR 0。15。

assuming the returns of FGB are normally distributed, what is the estimated liquidity-adjusted,1-day 95% VaR, using the constant spread approach?

A。 EUR 260

B。 EUR 297

C。 EUR 372

D。 EUR 390

Answer: B

Explanation: The constant spread approach adds half of the bid-ask spread ( as a percent ) to the VaR calculation:

Daily 95% VaR =45,000*(1.645*0.0030)=EUR 222.08


Liquidity cost =45,000*(0.5*0.15/45)=75 LVaR = VaR + LC=297.08