Quoting a market in the spread A minus B
Question
You make markets in two products, written bid @ ask: product is quoted and product is quoted . You are now asked to quote the combination (long one , short one ), consistent with your existing markets.
If your market in is , report .
Short answer
. To buy you would buy at your bid and sell at your ask, so the bid is ; to sell it you sell at your ask and buy at your bid, so the ask is . The market is and . Simply subtracting bid from bid would give a crossed market.
Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.
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Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
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