Topic 1: Financial Markets1. You are among the OTC market makers in the stock of Nvidia and quote a bid of$102.25 and an ask of $102.50. Suppose that you have a zero inventory.(a) On Day 1 you receive market buy orders for 10,000 shares and market sell ordersfor 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 tohave negative inventory, e.g., by short-selling. Further, there is more than one correctway to value an inventory, but please state what assumption your valuation is basedon.)(b) Before trading begins on Day 2 the company announces promising new GPU technology. The quoted bid and ask jump to $110.25 and $110.50, respectively. DuringDay 2 you receive market sell orders for 8,000 shares and buy orders for 2,000 shares.What is your total profit or loss over the two-day period? What is the value of yourinventory at the end of Day 2?(c) What is a market maker’s objective? Is there anything you could have done duringDay 1, consistent with a market maker’s objective, that would have improved yourperformance over the two-day period?
Topic 1: Financial Markets
1. You are among the OTC market makers in the stock of Nvidia and quote a bid of
$102.25 and an ask of $102.50. 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, e.g., by short-selling. 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 promising new GPU technology. The quoted bid and ask jump to $110.25 and $110.50, respectively. During
Day 2 you receive market sell orders for 8,000 shares and buy orders for 2,000 shares.
What is your total profit 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?
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