Question: Suppose an asset has value 110 with probability 0.5 and 90 with probability 0.5. Noise traders buy or sell x units of the asset with

Suppose an asset has value 110 with probability 0.5 and 90

Suppose an asset has value 110 with probability 0.5 and 90 with probability 0.5. Noise traders buy or sell x units of the asset with equal probability, and an informed trader with perfect knowledge of the asset value decides to buy y units of the asset if the value is 110 and sell z units of the asset if the value is 90. A risk neutral competitive market maker observes x and y or z, and sets a price p which clears the market. Derive the expected profits for the informed trader as a function of the absolute value of the noise traders, trading volume lxl. Explain why the profits are increasing in I Suppose an asset has value 110 with probability 0.5 and 90 with probability 0.5. Noise traders buy or sell x units of the asset with equal probability, and an informed trader with perfect knowledge of the asset value decides to buy y units of the asset if the value is 110 and sell z units of the asset if the value is 90. A risk neutral competitive market maker observes x and y or z, and sets a price p which clears the market. Derive the expected profits for the informed trader as a function of the absolute value of the noise traders, trading volume lxl. Explain why the profits are increasing in

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