6. Based on his estimates of the risk of a security, a trader believes that the price...
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6. Based on his estimates of the risk of a security, a trader believes that the price of a stock traded in a dealer market will fall within a $3 range, with potential prices being uniformly distributed. The trader knows that there are a substantial number of informed traders trading this stock, and that these informed traders will know with certainty the value of the stock. The dealer’s bidoffer quotations are 12.9 and 14.1, respectively. Based on these quotes provided by the dealer, what is the probability that the trader will estimate that any given trade will have originated with an informed trader?
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Muhammad Salman Alvi
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