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A trader wishes to unwind a position of 60 million units in an asset over 10 days
A trader wishes to unwind a position of 60 million units in an asset over 10 days. The dollar bid-offer spread as a function of daily trading volume, q, is a+be where a=0.2, b=0.1, and c=0.08 and q is measured in millions. The standard deviation of the price change per day is $0.1. what is the optimal strategy that maximises the %95 confidence level for the costs?
Select one:
a. VaR - $10.05
b. VaR - $9.90
c. VaR = $15.72
d. VaR - $13.24
Expert Solution
Answer :- b) VaR = $9.90
Explanation :-
The amounts traded on suncessive days should be 15.9, 12.9, 10.0, 7.4, 5.2, 3.4, 2.2, 1.4, 0.9,and 0.7.
The bid–offer spread cost is $13.4.
The total price variance is 36.6 so that the VaR for the market risk with a 95%
?Confidence level = 1.645 °— √ 36.6 = $9.9.
Note:-(The objective function that is minimized is the sum of these two, or $23.3.)
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