In a Sealed-Bid Auction with Private Values Drawn Independently from a Common

question 18

Multiple Choice

In a sealed-bid auction with private values drawn independently from a common distribution, each buyer's equilibrium bid is set equal to:

• A) his reservation price.
• B) the expected reservation price of the other bidders.
• C) the expectation of the third-highest buyer value.
• D) the expectation of the second-highest buyer value.
• E) the expectation of the next-highest buyer value conditional on it being smaller than the bidder's value.

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Definitions:

Derivative Security

A financial instrument whose value is based on the value of another asset.

Economic Exposure

Long-term financial risk arising from permanent changes in prices or other economic fundamentals.

Cross-Hedging

Hedging an asset with contracts written on a closely related, but not identical, asset.

Basis Risk

Risk that futures prices will not move directly with the cash price hedged.