Day CF 1 30000 2 5000 3 4000 4 20000 5 7000 6 9000 7 5000 8

Day CF

1 -$30,000

2 -$5,000

3 -$4,000

4 -$20,000

5 $7,000

6 -$9,000

7 -$5,000

8 -$1,000

9 -$2,500

10 -$7,0000

(e) What do you find interesting about your calculations from part d? What is causing these interesting values.

Solution

c Calculate the Black Bear lamda and its associated probability of illiquidity Calculate the Black Bear lamda and its associated probability of illiquidity $ Day CF Current Cash Holding Deficit Surplus Net Probability of Illiquidity 1 -30000 10000 -20000 -20000 0.666667 2 -5000 10000 5000 5000 3 -4000 10000 6000 6000 4 -20000 10000 -10000 -10000 0.5 5 7000 10000 17000 17000 6 -9000 10000 1000 1000 7 -5000 10000 5000 5000 8 -1000 10000 9000 9000 9 -2500 10000 7500 7500 10 -70000 10000 -60000 -60000 0.857143 -39500 -3950 2.02381 Since the average as calcuated is -6650 Therefore Black Bear Lamda -2700 The associated probability of Illiquidity is given in the last table which is 2.02 d Assuming that there is error in the calculation of cash holdings of $5000 in cash holding the new calculation is as below Calculate the Black Bear lamda and its associated probability of illiquidity $ Day CF Current Cash Holding Deficit Surplus Net Probability of Illiquidity 1 -30000 5000 -25000 -25000 0.833333 2 -5000 5000 0 0 3 -4000 5000 1000 1000 4 -20000 5000 -15000 -15000 0.75 5 7000 5000 12000 12000 6 -9000 5000 -4000 -4000 0.444444 7 -5000 5000 0 0 8 -1000 5000 4000 4000 9 -2500 5000 2500 2500 10 -70000 5000 -65000 -65000 0.928571 -89500 -8950 2.956349 Since the average as calcuated is -6650 Therefore Black Bear Lamda 2300 The associated probability of Illiquidity is given in the last table which is 2.95 e Since from the calculation from part d above it is found out that the cash holdings decrease thenet surplus changes and it causing the Black Bear Lamda to be considerable improve from a negative situation to a postive value.The Probability of illiquidity however increases as the number of positions which are illiquid increase as compared to the first position