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Informed trader on a binary

Market makingEasy

A contract pays $100$ if a company wins a bid and $0$ otherwise. A market maker quotes a bid of $48$ and an ask of $52$ . A trader who knows the company has won buys $1$ unit at the ask. What is the market maker's profit on this trade?

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Hint

The unit pays $100$ for certain, since the trader knows the outcome.

Solution

The market maker receives $52$ and must pay out $100$ .
The profit is the price received minus the payout.
The profit is $52 - 100 = - 48$ .

Answer: $- 48$

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