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What the dealer will quote a price of

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Reference no: EM132856474

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.

Problem 1: Now, if a buyer is the first trader to enter the market, the dealer will quote a price of:

a. $4.50

b. Other

c. $4.90

d. $4.725

e. $4.55

Reference no: EM132856474

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