Suppose that a trader has bought some illiquid shares. In particular, the trader has 100 shares of A, which is bid $50 and offer $60, and 200 shares of B, which is bid $25 offer $35. What are the proportional bid–offer spreads? What is the impact of the high bid–offer spreads on the amount it would cost the trader to unwind the portfolio. If the bid–offer spreads are normally distributed with mean $10 and standard deviation $3, what is the 99% worst-case cost of unwinding in the future as a percentage of the value of the portfolio?
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