A risk-neutral dealer believes that a stock's fundamental value is equally likely to be 75 or 125.

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A risk-neutral dealer believes that a stock's fundamental value is equally likely to be 75 or 125. He believes the fraction of informed traders is 35 %. He receives the following sequence of orders : ['sell ', 'buy ', 'buy ']

a. What is the price at which the third-order is executed?

b. What does the dealer expect the fundamental value to be after the third order is executed?

c. What is the ask that the dealer quotes after the third-order?

d. What is the bid that the dealer quotes after the third-order?

Related Book For answer-question

Probability and Random Processes With Applications to Signal Processing and Communications

ISBN: 978-0123869814

2nd edition

Authors: Scott Miller, Donald Childers

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Posted Date: Mar 22, 2022 07:00 AM

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A risk-neutral dealer believes that a stock's fundamental value is equally likely to be 75 or 125.

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Expert Answer:

ANSWER A A market order is an order to buy or sell a security immediately This type of order guarantees that the order will be executed but does not guarantee the execution price A market order genera... View the full answer

Probability and Random Processes With Applications to Signal Processing and Communications

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