An informed insider, who knows the value of an asset, is considering trading it to...
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An informed insider, who knows the value of an asset, is considering trading it to make profits. An uninformed noise trader buys or sells the asset with equal probabilities, depending on liquidity needs. Trade size is 1 unit of the asset. A risk neutral market maker believes the asset has a value of 80 with a probability of 0.6 and 30 with a probability of 0.4. She cannot identify the type of a trader, but clears the market by observing the order flow and then setting a price to make zero expected profits. Work out the expected trading profit for the insider and optimal price setting strategy of the market maker. An informed insider, who knows the value of an asset, is considering trading it to make profits. An uninformed noise trader buys or sells the asset with equal probabilities, depending on liquidity needs. Trade size is 1 unit of the asset. A risk neutral market maker believes the asset has a value of 80 with a probability of 0.6 and 30 with a probability of 0.4. She cannot identify the type of a trader, but clears the market by observing the order flow and then setting a price to make zero expected profits. Work out the expected trading profit for the insider and optimal price setting strategy of the market maker
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