1. NoWorks stock at the end of the day is expected to be worth $100 (80% probability) or 110 (20% probability), pending a news announcement. A dealer believes that 90% of the traders are noise traders and 10% are informed traders. The dealer is setting her ask price. At what value of the ask price does she just break even?
2. Dealers face a second type of risk in their market making activities. What is this risk? Describe in no more than three sentences. (35 points)