What formula describes the relationship between spread sensitivity and fund outflows?

The correct understanding of the relationship between spread sensitivity and fund outflows revolves around the notion of how much a change in spreads can affect the fund's outflows. Spread sensitivity reflects a fund's vulnerability to changes in market spreads, particularly during periods of increased volatility or reduced investor confidence.

In this context, the formula that captures this relationship is based on how a certain percentage of outflows relates to the changes in spreads, measured in basis points. Thus, the proper formulation indicates that as spreads widen, the percentage outflow can be expressed as a function of the spread widening. Specifically, it defines that for every unit of spread widening (in basis points), the percentage outflow increases, which is captured in option B.

This formula highlights the inverse nature of this relationship: a higher spread widening leads to higher percentage outflows, showcasing how sensitive the fund is to changes in spreads. In other words, it answers how much percentage outflow will occur for every basis point that the spreads widen. This understanding is crucial for analyzing the liquidity risk and overall market sentiment toward a particular fund, especially in distress periods.

The other options either misrepresent the relationship or introduce irrelevant variables that do not accurately capture the dynamics between spread sensitivity and fund outflows, thus