If a trader needs to unwind a **large position**, he or she is exposed to:

- the potential loss from price movements, and
- trading liquidity risk

The trader may wish to **minimize** the Value-at-Risk (VaR) after considering the trading costs (or cost of liquidation). What is the **optimal trading strategy** then to achieve the trader’s objective?

**Part 1 (Concept and Motivation)**

The video explains the concept and define the problem set. At the end, I will use a simple case which will be the input to Part 2.

**Part 2 (Building the model)**

Using the parameters from the Case in Part 1, in this video, I walk through the model building in Excel. I will model the VaR of the position outstanding at the end of each day and the cost of liquidating the position every day. The objective is to minimize the VaR + cost of liquidation over the trading period.

In this model, I assume liquidation in a normal market. If there is a **stressed market scenario**, the cost of liquidation can be modeled as (mean bid-offer spread + Z * standard deviation of bid-offer spread), where Z is the inverse of a cumulative distribution function (e.g. normal distribution).

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