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Informed buyer loss

Market makingEasy

A market maker quotes a bid of $99$ and an ask of $101$ on a contract. A trader who knows the contract will be worth $105$ buys $1$ unit at the ask. What is the market maker's profit on this trade, measured against the true value?

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Hint

The market maker sold at the ask and the unit is really worth more.

Solution

The market maker receives $101$ for a unit worth $105$ .
The profit is the price received minus the true value.
The profit is $101 - 105 = - 4$ .

Answer: $- 4$

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