Combining Bid and Ask Quotes to Make a Market in a Sum

Summary

The document poses a market-making question for a synthetic product formed by adding two instruments. One instrument is quoted at 35 bid and 40 ask, while the other is quoted at 15 bid and 30 ask. The task is to determine the bid and ask to quote for their sum.

The underlying pricing principle is to combine executable sides: buying both components sets the synthetic bid, while selling both sets its ask. This produces a bid of 50 and an ask of 70 under the stated quotes, assuming matching units, synchronized prices, and sufficient liquidity in both instruments. The prompt supplies no discussion of size, fees, hedging, or how to handle changing markets, so those practical considerations remain outside its scope.

Key ideas

• The bid for a sum is formed by adding the component bids.
• The ask for a sum is formed by adding the component asks.
• The quoted synthetic market assumes compatible units and executable liquidity in both components.
• The question does not address fees, quote size, or market movement.

Tags

# Combination of bid ask of two instruments


# Combination of bid ask of two instruments












You have 2 instruments: X in which you are quoting 35 @ 40 and product Y in which you are quoting 15 @ 30. We want to make a market on the product X+Y. What is the bid-ask spread you will quote?

Got this in an interview for a quant firm.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.