# P2.T8.20.1. Liquidity trading cost (Hull Ch.24)

#### Nicole Seaman

##### Director of FRM Operations
Staff member
Subscriber
Learning objective: Explain and calculate liquidity trading risk via cost of liquidation and liquidity-adjusted VaR (LVaR).

Questions:

20.1.1. An asset that is not very liquid is quoted bid $89.00, offer$96.00. Which is nearest to the proportional bid-offer spread?

a. 0.0378
b. 0.0757
c. 0.1538
d. 7.000

20.1.2. An investor holds two positions:
• Short shares worth $10,000 where the proportional bid-offer spread is 0.030, and • Long shares worth$17,000 where the proportional bid-offer spread is 0.040
What is the approximate cost to the investor to unwind this two-position portfolio?

a. $490.00 b.$750.00
c. $980.00 d.$1,300.00

20.1.3. An investor holds two positions:
• Long shares worth $25,000 where the bid-offer spread has a mean and standard deviation of 0.050 • Long shares worth$40,000 where the bid-offer spread has a mean and standard deviation of 0.030
If we assume the bid-offer spreads are normally distributed, then which is nearest to the worst expected cost of unwinding with 95.0% confidence?

a. $1,730 b.$2,950
c. $3,240 d.$6,500