Skip to content

FRM Part II · FRM Exam Part II · Liquidity Risk Management

In a liquidation model, a trader holds 1,000,000 shares priced at USD 40. Selling x shares per day causes a temporary price concession of 0.000002 × x per share in USD relative to the prevailing price (linear impact), and the price is otherwise unchanged. Comparing selling all shares in one day with selling 500,000 shares on each of two days, what is the total impact cost saving from the two-day plan?

The saving is USD 1,000,000. Selling all at once costs a USD 2 concession on 1 million shares, or USD 2 million. Splitting into two 500,000-share days costs USD 1 per share on the same shares, or USD 1 million.

  1. AUSD 1,000,000
  2. BUSD 1,500,000Correct
  3. CUSD 500,000
  4. DUSD 2,000,000

Explanation

One day: concession per share = 0.000002 × 1,000,000 = USD 2, applied to 1,000,000 shares = USD 2,000,000. Two days: concession = 0.000002 × 500,000 = USD 1 per share on 1,000,000 shares = USD 1,000,000. Saving = USD 1,000,000. Check: cost = k·x² per day, 2,000,000 versus 2 × 500,000 = 1,000,000, so saving is USD 1,000,000. Option USD 1.5m is therefore wrong.

Did you get it right without looking?

One question tells you little. A timed set on Liquidity Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Liquidity Risk ManagementFree diagnostic mock

More Liquidity Risk Management questions