15, Dec 2020
A market maker believes that the future stock price can be either $20 or $40, she asses the current probability of it being $40 as 0.32, she assesses the likelihood of encountering an informed trader who knows the future value with 95% certainty as being 0.02, and she can’t distinguish between informed or uninformed traders.What should be her bid price?

A market maker believes that the future stock price can be either $20 or $40, she asses the current probability of it being $40 as 0.32, she assesses the likelihood of encountering an informed trader who knows the future value with 95% certainty as being 0.02, and she can’t distinguish between informed or uninformed traders.What should be her bid price?