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1、End-of-ChapterExerciseSolutionsCHAPTER11.Vigorouscompetitionamongprofessionalshort-termtraderscanitselfleadtoveryimportantbenefitsforlong-terminvestors,includingnarrowerspreadsandgreaterdepth.2.First,recallthedefinitionoftrading:asecuritytransactionthatcreatesaportf
2、oliopositionbasedonaninvestmentdecision.Whilethetrademightindeedresultfromadecisiontospeculate,itmightalsoresultfromalong-terminvestmentdecisionordecisionstohedgeorengageinarbitrage.Whiletraderscanbespeculatorswhofocusonprofitsderivedfrompricechanges,traderscanalsob
3、earbitrageurswhofocusonpricediscrepanciesandhedgerswhoseektocontrolrisk.Tradersmightevenbeexecutingtransactionsasanagentonalong-terminvestorsaccount,actingasabrokerforthatinvestor.3.Youshouldbidmorethan$200,say,$1000,becauseyouwillbeabletoobtaintheobjectfor$10,these
4、cond-highestbid.Noonewillbewillingtobidagainstyouformorethan$200toobtaintheobjectfor$1000.Thus,itisimportantforsecond-priceauctionbidstobesealed.4.a.E[xMAX]5500,0001(1,000,0002500,000)32/(211)5833,333E[xMIN]5500,0001(1,000,0002500,000)/(211)5666,666,whichisthesecond
5、-highestbid.b.E[xMAX]5500,0001(1,000,0002500,000)33/(311)5875,000E[xMIN]5500,0001(1,000,0002500,000)/(311)5625,000Withonlythreedrawsfromthedistribution,thesecondhighestbidisthemeanofthehighestandthelowest.E[x2ndhighest]5500,0001(1,000,0002500,000)32/(311)5750,000,wh
6、ichisthesecond-highestbid.c.E[xMAX]5500,0001(1,000,0002500,000)3999/(99911)5999,500E[xMIN]5500,0001(1,000,0002500,000)/(99911)5500,500Thesecond-highestbidexpectedvalueisE[xMAX]2(x22x1)/(n11)E[x2ndhighest]5999,5002(1,000,0002500,000)/(99911)5999,000,whichisthesecond-
7、highestbid.Notethatthesecond-highestbidincreasesasthenumberofbiddersincreases.381382END-OF-CHAPTEREXERCISESOLUTIONS5.Obviously,theTreasurywantstosellasmanybillsaspossibleatthelowestpossibleprices.Thebid-to-coverratiointhisillustrationis$34billion/$20billion51.7.Firs
8、t,the$2.5billioninnoncompetitivebidswillbesubtractedfromthe$20billiontotaltodeterminethestop-outprice.Bidswillbesatisfiedfromthelowestyiel
