The model presented in this paper attempts to quantify the concept of liquidity and establishes a relation between various measures of market performance. Informational inefficiency is argued to be the main reason for the unavailability of an asset at its equilibrium price. The asset, however, can always be purchased at a higher price or sold at a lower price, depending on the market expectations, unless trading has ceased. The mathematical model describing the asset–price behaviour together with arbitrage considerations enable us to estimate the component of the bid–ask spread resulting from imperfect information. The impact of the market liquidity on hedging an option with another option as well as the underlying asset itself is also examined. In this last case uncertainty cannot be completely eliminated from the hedged portfolio, although a unique risk–minimizing strategy is found.