Came accrosss following GARP question from 2009:

You are holding 100 shares at USD 50. Daily historical mean and volatility of returns are 1% and 2%. Bid-ask spread daily historical volatility is 0.5% and 1%. Calculate daily LVAR at 99%

Answser:

VAR = 50 x 100 x (2.33 x 0.02 -0.01) = 183

LC = 50 x 100 x 0.5 x (2.33 x 0.01 x 0.005) = 71

LVAR = 254

**Why is it that we subtract 0.01 to the product of 2.33 x 0.02 in the VAR calculation?****Why is it that we just don't use the historical mean for the spread?**

Thank you!