QUESTION 2 ( 50 marks in total) 1. Assume that a financial institution (FI) has purchased 5,000 shares of AB and 7,500 shares of CD. The share's AB current bid and offer are 85.5 and 86.3 respectively page 2 of 4 version 1. while the share's CD current bid and offer are E78.1 and E78.6 respecuvery of 2% and a further that the bid-offer spreads are normally distributed with a standard deviation of standard deviation of 5% for AB and with a mean of 1.6% and 3% for CD. a) Which of the two shares ( AB and CD ) has the higher cost in terms of execution? Explain. [5 marks] b) Calculate the cost of liquidation in a normal market. [10 marks] c) Calculate the cost of liquidation in a stressed market at a 95% confidence level. Using your answers to (b), what do you observe? [10 marks] II. Answer the following questions: a) Define model risk. [5 marks]