You are a price maker in a market containing many price-makers. Your current position is zero (i.e. you are not holding any shares) Your objective is to be long shares but are in no hurry to do so. The current market price is $39.75/$42.75. What action should you undertake to achieve your objective? a. Show a price of $40.75/$43.75 to the market b. Sell shares at $39.75 at the market price c. Show a price of $38.75/$41.75 to the market d. Show a price of $39.75/$42.75 to the market e. Buy shares at $42.75 at the market price
Question
You are a price maker in a market containing many price-makers. Your current position is zero (i.e. you are not holding any shares) Your objective is to be long shares but are in no hurry to do so. The current market price is 42.75. What action should you undertake to achieve your objective?
a. Show a price of 43.75 to the market
b. Sell shares at $39.75 at the market price
c. Show a price of 41.75 to the market
d. Show a price of 42.75 to the market
e. Buy shares at $42.75 at the market price
Solution
The correct action to take in this scenario would be option E: Buy shares at $42.75 at the market price.
Here's why:
As a price maker, you have the ability to set the price at which you're willing to buy or sell shares. In this case, your objective is to be long shares, which means you want to buy shares now with the expectation that the price will rise in the future.
The current market price is 42.75. This means that sellers (like you) are willing to sell shares for 39.75.
If you're in no hurry to buy shares, you could wait for the price to drop. However, if you want to start achieving your objective now, you should buy shares at the current market price.
Therefore, the correct action to take is to buy shares at $42.75 at the market price (option E).
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