You are a market maker in Qantas shares (QAN). You believe that, at the end of the session, QAN stock will be worth $5.80 (80% probability) or $6.00 (20% probability). Typically, 90% of incoming traders are uninformed, and equally likely to buy or sell. The remaining 10% of traders know QAN's end of session value.

1. At what level would you set your ask price so that you just break even? [9 marks]
2. Before posting your ask price, you notice that the date is 30th June. Uniformed traders are more likely to be selling stock to pay there taxes and so there is only a 30% probability that an uniformed trader will be buying today. How will this affect your ask price? (NB: No calculation is required) [1 mark]

Answer rating: 100% (QA)

To set the ask price to break even we need to consider the expected valu... View the full answer