FRM Part II · FRM Exam Part II · Liquidity Risk Management
A portfolio manager holds a position in a corporate bond whose quoted bid is 98.40 and ask is 98.60. The manager uses the mid-price to mark the position and wants a simple measure of the cost of immediately liquidating the position at the bid. Which statement best describes the liquidity cost per 100 face value?
The liquidation cost is 0.10 per 100 face value. The mid-price is 98.50 and selling at the bid of 98.40 gives up half the 0.20 spread. The full spread would only represent a round-trip cost of buying and selling.
- A0.10, equal to half the bid-ask spreadCorrect
- B0.20, equal to the full bid-ask spread
- C0.10, equal to the full bid-ask spread
- D0.20, equal to half the bid-ask spread
Explanation
Mid = (98.40+98.60)/2 = 98.50. Selling at the bid of 98.40 costs 0.10 per 100, which is half the spread of 0.20. The 0.20 options use the full spread, which would be the round-trip cost, not the one-way cost of liquidation.
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