Learn / Library / Market making

Bid from required edge

Market makingEasy

A coin lands heads with probability $0.62$ . A contract pays $100$ if the coin lands heads and $0$ otherwise. A market maker wants an expected edge of at least $2$ per unit on each side of the market and posts the highest bid that meets this. What is the bid?

Checking an answer needs JavaScript. The hint and the solution open without it.

Hint

Fair value is probability times payout.

Solution

The fair value is $100 \times 0.62 = 62$ .
The bid must leave an edge of $2$ below fair value.
The bid is $62 - 2 = 60$ .

Answer: $60$

Next question Back to the library