Question 3

Suppose that a bank has bought 14 million Gamestop shares and 42 million ounces of silver. Gamestock shares have bid price $99.5 and offer price $100.5. Silver has bid price $19.5 and offer price $20.5.

a) What are the mid-market value of the Gamestop share position and of the silver position?

[3 marks]

b) What are the proportional bid-offer spread for the Gamestop share position and of the silver position?

[3 marks]

c) What is the cost of liquidation of the bank in a normal market?

[4 marks]

Assume now the market is in stressed conditions. The mean and standard deviation for the Gamestop shares bid-offer spread is $1.0 and $2.5, respectively.The mean and standard deviation for the silver bid-offer spread is $1.0 and $1.5, respectively.

d) What are the mean and standard deviation of the proportional bid-offer spread for both Gamestop shares and silver?

[4 marks]

e) Assume the spreads are normally distributed, what is the cost of liquidation that will not be exceeded with 95% probability (use =1.645)?

[4 marks]

f) Assume the spreads are normally distributed, what is the cost of liquidation that will not be exceeded with 99% probability (use =2.326)?