Consider a Glosten and Milgrom (1985) type equity market with the following features:

• The stock has a 50% chance of having a terminal value of $4.90.
• The stock has a 50% chance of having a terminal value of $4.20.
• Informed an uninformed traders are equally likely to enter the market at any given point in time.

Now, if a buyer is the first trader to enter the market, the dealer will quote a price of:

a.

$4.725

b.

Other

c.

$4.55

d.

$4.90

e.

$4.50