Difficulty: Medium
Category: Betting Games
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: probability, market-making, expected-value, risk-management
You are a market maker for a betting game involving the sum of two fair six-sided dice. A player rolls the two dice, and you pay out based on the sum. You are currently quoting a probability of $$1/6$$ (16.67%) for the sum to be 7. Your trading model suggests that the true probability of rolling a 7 is actually higher than your current quote. Given this information, which of the following actions would you take, assuming you want to maximize your expected profit and manage risk effectively?
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