You are among the OTC market makers in the stock of Bio-Engineering, Inc. and

quote a bid of 102 1/4 and an ask of 102 1/2. Suppose that you have a zero inventory.

(a) On Day 1 you receive market buy orders for 10,000 shares and market sell orders

for 4,000 shares. How much do you earn on the 4,000 shares that you bought and

sold? What is the value of your inventory at the end of the day? (Hints: It is possible

to have negative inventory. Further, there is more than one correct way to value an

inventory, but please state what assumption your valuation is based on.)

(b) Before trading begins on Day 2 the company announces trial testing of a cure for

acne in mice. The quoted bid and ask jump to 110 1/4 and 110 1/2. During Day 2 you

receive market sell orders for 8,000 shares and buy orders for 2,000 shares. What is

your total prot or loss over the two-day period? What is the value of your inventory

at the end of Day 2?

(c) What is a market maker's objective? Is there anything you could have done during

Day 1, consistent with a market maker's objective, that would have improved your

performance over the two-day period?