Assignment:
You are a manager of a renowned hedge fund and are analyzing a 1,000 share position in an undervalued but illiquid stock BNA, which has a current stock price of USD 80 (expressed as the midpoint of the current bid-ask spread). Daily return for BNA has an estimated volatility of 1.54%. The average bid-ask spread is USD 0.10. Assuming returns of BNA are normally distributed, what is the estimated liquidity-adjusted daily 95% VaR, using the constant spread approach?
a. USD 1,389
b. USD 2,076
c. USD 3,324
d. USD 4,351