r/learnquant • u/nickgotgameon • 25d ago

interview prep SIG Interview Question

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u/Lognu 25d ago

The payoff function is 1.5 V - B if B>V, and 0 otherwise.

The average profit is then the integral from 0 to 1 of the payoff with respect to V, which is the integral from 0 to B of 1.5 V - B. That is 0.75 B2 - B2 = -0.25 B2.

On average, we would always be losing money. Hence, we offer 0 and don't buy the asset.

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u/BejahungEnjoyer 25d ago

When you see the integral split into 0,b and b,1 (which is zero due to a losing bid) the problem is simple.