Question

the market maker for stock a observes that at the current bid and ask price, her inventory is getting to low. what should she do to bring it back up?

(a) raise the bid and raise the ask

(b) raise the bid and lower the ask

(c) lower the bid and raise the ask

(d) lower the bid and lower the ask

Answer 1

Answer-

The correct Option is a.  raise the bid and raise the ask.

When the market maker’s inventory position deviates from his or her optimal position, the bid and ask prices will be different from the preferred prices; if the inventory is too high, the prices will be lower than the preferred prices; if the inventory is too low, the bid ask prices will be higher than the preferred prices.

Thus the market maker should increase the bid and ask prices.

The other Options b,c and d are incorrect.