How much should you pay in market making games

If the question for ex is you get the dollar amount on a 6 sided dice roll -> $3.5 expected value, what is the right answer to say for what you should pay?

Intuitively I feel it needs to be $3.25 or less, but maybe the better answer is anything less than $3.5 ?

Bonus: If you were given a million dollars but need to return it in a few days, how would you invest it.

Thanks :)

Comments (6)

Aug 11, 2019

There's no right answer to this question. I'd probably think about with what certainty you expect that outcome though. Say you expect there to be a 10% margin of error, then your bid would be expectation - margin of error*expectation, which would make your market $3.15 - $3.50. Think along those lines.

Aug 12, 2019

I'm not an expert in market making but why is the range centered on 3.30 and not 3.50?

Aug 13, 2019

The true market is 3.30 - 3.65 that I brought up in the example. However, making 3.15 - 3.50 is a correct answer as well, you'll just have less downside risk. I kind of added my own trading style to the answer without an explanation there...

    • 1
Aug 13, 2019

.

Aug 14, 2019

while the statistical avg is 3.5, you can't actually roll a 3.5 so its either going to be (on avg) a 3 or a 4....

1/6 = 16.666% and a die has 6 sides so, at the narrowest, i would be 3.33 bid vs 3.67 offer

however, when being asked "what should you pay?" the answer is obviously "something below the expected value of 3.5 and the lower the better"

depending on how many rolls you get (and the possibility of other bidders potentially competing away your bid) will determine how close to 3.5 i would be willing to pay. If just 1 roll, then my bid would be 3 or below. If there are competitors bidding, then i would bid just over 3 (3.05)

just google it...you're welcome

Aug 15, 2019
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