The two-sided quote that loses on every fill
Asked at SIG
You post bid / ask on a contract you believe is worth . Your counterparty, though, knows the true value , which turns out to be equally likely or . They trade only when it's profitable for them, buying your offer if is high, selling to your bid if is low.
What is your expected profit on this trade? How wide would you have had to quote to avoid a guaranteed loss?
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.