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The observed bid and ask of stock XYZ are 15.57 and 15.71, respectively. XYZ has an estimated annualized return volatility of 25%. Assume σspread=0.005 and 250 trading days in one year. a. Estimate the 1-day, 95% VaR of a 5,000 share position in stock XYZ. b. Estimate the 1-day 95% LVaR of the position, using the constant spread approach. c. Estimate the LVaR to VaR ratio using the exogenous spread approach. d. Suppose the position represents 10% of the size of the market and price elasticity of demand for stock XYZ is -0.6. Calculate the LVaR to VaR ratio using the endogenous price approach. e. Calculate the combined LVaR to VaR ratio incorporating both exogenous and endogenous effects.

Financial Management, Finance

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