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A bank faces random deposit withdrawals that are represented by a normal distribution. If the bank prepared an optimal liquidity reserve of $5 million to
A bank faces random deposit withdrawals that are represented by a normal distribution. If the bank prepared an optimal liquidity reserve of $5 million to cope with its liquidity risk, what is the expected withdrawal? Suppose the interest rate on its loans is 8%, that on its reserve is 2%, penalty rate of liquidity shortage is 16%, standard deviation of the distribution is $15 million.
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