Question

You are among the OTC market makers in the stock of Bio-Engineering, Inc.and quote a bid of 102.25 and an ask of 102.5. Suppose you have a zero inventory.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?

Answer 1

Answer:

Ans.

a) You earn $1,000 for selling 4,000 shares

b) The value of your final inventory is $615,000

Explanation:

Hi, what you earn is the spread, which is the difference between the bid and ask quote, that is:

$Spread=Ask-Bid=102.50-102.25=0.25$

This means that you earn $0.25 per share you sell, therefore your earnings are:

$Earnings=0.25*4,000=1,000$

Now, for your final inventory (its value) all you have to do is to multiply your remaining inventory (6,000 shares, because you bought 10,000 and sold 4,000) by the ask quote.

$Final Inventory(Dollars)=6,000*102.50=615,000$

Best of luck.