Question 2 Due to heightened political risk and volatile stock market reaction, Bank of Paz considers the possibility of liquidating its entire Business Unit 3 (i.e. equity trading unit). Assume that all the business units remain unchanged as previous question presents: Business Unit 1 Fixed-income Trading 1000 Business Unit 2 FX Trading 500 Business Unit 3 Equity Trading 300 0.60% Exposure USD Return volatility Correlation with BU1 Correlation with BU2 Correlation with BU3 1.40% -0.04 1.80% 0.03 1 1 0.25 -0.04 0.03 0.25 1 Business Unit 3 current only invests in stock Vodafone Group plc. The mean and standard deviation for the proportional bid-offer spread for this stock are 0.05 and 0.001, respectively. The spread is normally distributed. Please calculate the total potential loss from this business unit due to market risk and liquidity risk today, if the confidence level is set at 99%. [5 marks] Question 2 Due to heightened political risk and volatile stock market reaction, Bank of Paz considers the possibility of liquidating its entire Business Unit 3 (i.e. equity trading unit). Assume that all the business units remain unchanged as previous question presents: Business Unit 1 Fixed-income Trading 1000 Business Unit 2 FX Trading 500 Business Unit 3 Equity Trading 300 0.60% Exposure USD Return volatility Correlation with BU1 Correlation with BU2 Correlation with BU3 1.40% -0.04 1.80% 0.03 1 1 0.25 -0.04 0.03 0.25 1 Business Unit 3 current only invests in stock Vodafone Group plc. The mean and standard deviation for the proportional bid-offer spread for this stock are 0.05 and 0.001, respectively. The spread is normally distributed. Please calculate the total potential loss from this business unit due to market risk and liquidity risk today, if the confidence level is set at 99%. [5 marks]