FRM Part II · FRM Exam Part II · Liquidity Risk Management
A fund holds EUR 10 million of a bond. Its mean relative bid-ask spread is 0.50% and the spread volatility is 0.20%. Using a spread multiplier of 2.33 at 99% confidence, the liquidity cost is closest to:
The liquidity cost is half of the mean spread plus 2.33 times spread volatility, applied to position value. That is 0.5 × 0.966% × EUR 10 million, or EUR 48,300. Forgetting the half factor would double the cost wrongly.
- AEUR 25,000
- BEUR 48,300Correct
- CEUR 96,600
- DEUR 71,600
Explanation
Half of (0.50% + 2.33×0.20%) = half of 0.966% = 0.483%. Times EUR 10 million = EUR 48,300. Omitting the one-half factor gives EUR 96,600, and using the mean spread only gives EUR 25,000.
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