Relative Value Trading

1.Identical transferable shares are quoted $49.96/$50.04 on venue A and $50.03/$50.11 on venue B. What is the gross edge from buying on A and selling on B immediately?

2.A buy offer is $24.80 for 800 shares and a simultaneous sell bid is $24.95 for 500 shares. Both quote the same transferable claim. Round-trip fees are $0.03 per matched share. What net edge is available at the displayed prices if both orders fill?

3.A pair trade has $0.42 of expected convergence gain per unit. Entry costs $0.10, exit costs $0.13, and borrow costs $0.08. What is the expected edge before other risks?

4.A spread has an expected gross payoff of $10,000. Entering costs $2,000. Exit costs $3,000 normally or $9,000 with 25% probability. What is expected net payoff under these assumptions?

5.A trader buys a $1 million cash basket financed at 5% annual simple interest for 30 days. Using a 360-day year, what financing cost must the gap cover?

6.A $2 million short costs 6% annually to borrow. The desk expects to hold it 15 days on a 360-day basis. What is the estimated borrow cost at constant notional?

7.A futures contract trades at $102.40. Your simplified fair forward price is $101.80, including financing and dividends. If the futures can be shorted at $102.40 and total costs are $0.45 per unit, what is the modeled net edge of selling futures against the cash basket?

8.A cash-and-carry trade offers $0.25 per unit net at the best quotes for 1,000 units. The next 1,000 units would earn −$0.04 each. What size maximizes modeled total edge among whole 1,000-unit clips?

9.A backtest enters at the midpoint of both legs and exits at the midpoint. The live strategy crosses the spread on both legs. Which backtest change tests the most direct cost difference?

10.A desk considers resting a passive order in the cheap leg. When it fills, the expensive leg often moves against the hedge before execution. What should the desk compare with the saved spread?

11.A long and short leg each cost $0.02 per share to enter and $0.02 per share to exit. Each pair contains one share of each. What is the total execution cost per pair?

12.A desk estimates 22 basis points of convergence on equal long and short notionals, expressed per dollar of long notional. Fees and slippage are 5 basis points per leg for the full round trip. Borrow costs another 4 basis points on the short notional. What net edge remains on the same basis?

13.Two listed share classes have different dividend rights. Their quotes differ by $1.20. Which input matters before calling one cheap?

14.An ETF midpoint is 60 basis points above its estimated basket value. Only 20 basis points of the gap remain at executable quotes. Conversion, creation, and funding cost 25 basis points. What is the estimated net edge for a participant that can create shares?

15.A cash basket was marked before its market closed. The linked futures market has since moved sharply on news. What is the first check before treating the recorded gap as a trade?

16.A strategy expects a 40-cent gap to close by half on average. Total entry and exit costs are 23 cents per unit. What is expected net payoff per unit?

17.A pair offers $12,000 if it converges and loses $8,000 if it widens. Each outcome occurs with 50% probability, and the trade costs $3,000 in either case. What is expected net payoff?

18.A rich instrument can be shorted only after an approved borrow is confirmed. The indicated borrow rate is attractive but no shares are available. What is the practical decision?

19.A market order for a hedge would sweep three price levels. The fair-value comparison uses only the top-of-book price. What should replace that input?

20.A trader buys 300 units at $100.00 and 200 at $100.20 to complete the cheap leg. What average entry price belongs in the spread calculation?

21.An instrument offers an 18-basis-point quoted edge. A small trade would cost 10 basis points, but the target size would cost 23. What does the size comparison imply?

22.A share is quoted in dollars and its depositary receipt is quoted in euros. Each receipt represents two shares. Which comparison is appropriate?

23.A strategy earns 12 basis points after estimated costs, but the edge estimate has a 25-basis-point standard error. What should the desk do before sizing up?

24.A trade's gross expected edge is $0.50 per unit. Its short leg pays a $0.18 dividend during the hold that the desk must reimburse. Other costs total $0.22. What net edge remains if the gross estimate excludes the dividend?

25.A basis trade marks an ETF and its basket on the same clock. Most constituents are still quoted from several minutes ago. What matters for the signal?

26.A spread is 50 basis points. Round-trip costs are 16 basis points, and the desk requires 9 basis points of net edge. What minimum fraction of the gap must it expect to capture?

27.A strategy pays a fee to enter two legs separately. The venue offers a spread order with a slightly wider quote but no risk of filling only one leg. How should the desk compare them?

28.A gap exists only on a feed whose timestamp lags the exchange by two seconds. The current order book no longer shows it. How should the signal be classified?

29.A trade can be closed now for $4,000 after exit costs. Holding has expected additional gross gain of $1,000 but costs $1,400 more in borrow and funding. Ignoring other changes, how does holding compare?

30.A spread trade has $8,000 of edge after fees but before funding. One clearing arrangement uses twice the collateral of another equally reliable arrangement. What comparison helps allocate capital?

31.A desk's price model already subtracts expected dividends from a fair equity forward. How should it treat the same dividends when calculating the gap versus that fair forward?

32.A $500,000 spread earns 35 basis points before execution and funding. Fees and impact cost $1,200, and funding costs $800. What is net payoff?

33.A market maker sees an apparent gap during a call auction. The indicative price is favorable, but fill size and clearing price are uncertain. What should it model?

34.A venue rebate adds 1 cent per filled share. Passive orders there tend to lose 4 cents in post-fill price moves versus 1 cent on another otherwise identical venue without rebates. Which looks better on these two measures alone?

35.A trade has a positive net edge in the base case. Costs would rise in a stressed market while expected convergence would slow. What is the useful pretrade comparison?

36.A desk is long $4 million of a stock with market beta 1.2. Its index hedge has beta 1 per dollar. What short notional offsets the modeled market exposure?

37.A pair is long $3 million with beta 0.8 and short $3 million with beta 1.2. What net beta-dollar exposure remains?

38.A bond position gains $720 for a one-basis-point fall in rates. A short futures contract loses $80 under the same move. What number of short contracts offsets the first-order exposure?

39.A desk has a $1.5 million long position with beta 1.4. Its hedge is short $1.8 million of an index with beta 1. What broad market exposure remains?

40.A minimum-variance hedge ratio is 0.65 units of B per unit of A. The desk buys 800 units of A. How much B should it short under that estimate?

41.A pair starts beta neutral. The long leg rallies and its beta estimate also rises, with the short leg unchanged. What exposure should the desk reassess?

42.A futures hedge neutralizes a basket's estimated index beta. The basket is concentrated in regional banks. What stress should still be tested?

43.A desk buys the cheap leg first. The rich leg's bid drops by $0.18 before the short can fill. How does this affect an otherwise unchanged locked spread per unit?

44.A spread order fills 600 of 1,000 shares on the long leg. Its hedge ratio is 1.5 short shares per long share. The desk has shorted 300 shares. How many additional shares are needed to hedge confirmed fills?

45.A desk wants to hedge $460,000 of positive index exposure. Each short contract offsets $125,000, and only whole contracts are available. Which hedge minimizes absolute residual exposure?

46.A stock pair is nearly dollar neutral but has large offsetting gross positions. Why can a broker still ask for more collateral after an adverse move?

47.A trader uses a liquid sector ETF to hedge a single stock around its earnings release. What risk is most likely to remain?

48.Two equity positions have matching market beta exposure. The long is sensitive to rising oil and the short is not. What should the desk include in its stress test?

49.A model estimates a hedge ratio from daily closes, but the desk must hedge over minutes. What evidence should it seek?

50.A position has $500,000 of residual long currency exposure after hedging its equity beta. What is the approximate loss if that currency falls 2% against the reporting currency, all else equal?

51.A spread's expected convergence gain is $7,000. Its residual factor exposure would lose $11,000 in a plausible shock that breaches the desk's loss limit. What adjustment fits?

52.A cash bond portfolio hedged with futures has zero aggregate duration. It has positive rate duration at five years and negative rate duration at ten years. Which scenario can still create a loss?

53.A basket's beta hedge was estimated in calm markets. In recent sell-offs the basket has fallen more than the model predicts. What is a good response?

54.A convergence trade uses contracts expiring in different months. The hedge expires before the expected catalyst. What should the trader price into the plan?

55.A futures hedge costs $0.06 per unit to roll. The spread has $0.17 expected gross gain left and $0.08 expected exit cost. What incremental edge remains after roll and exit costs?

56.A pair uses a hedge with a contract multiplier of 50 dollars per point. The long leg gains $750 for a one-point move in the shared reference. How many short contracts offset that modeled exposure?

57.A long leg's gains are unrealized in a cash security, while its futures hedge requires daily cash payments after an adverse move. What risk should the desk manage?

58.A trader can hedge with either a close proxy that trades rarely or a less exact proxy that trades continuously. What comparison matters?

59.A spread position is profitable in dollars, but its measured P&L mostly came from a residual long market exposure. How should it be evaluated?

60.A desk estimates that a 1% sector move produces $40,000 of gain on the long and $28,000 of loss on the short. What is the modeled P&L from a 2% sector decline if sensitivities are linear?

61.A trader hedges a $2 million long basket with a $2 million short basket. After a rebalance, one short constituent is removed but its short remains open. What should the trader do?

62.A trader scales a pair from $1 million to $3 million. Stress loss was $12,000 per $1 million, assuming linear exposure. What stress loss should be tested before adding size-dependent costs?

63.A desk's position limit is $1 million gross, defined as absolute long plus absolute short market value. A fully dollar-matched pair has a $420,000 long leg. What gross capacity remains?

64.A new hedge reduces market beta but increases exposure to a known issuer event because it uses another share class with different rights. What should decide between this and the old hedge?

65.A trade compares a 30-day forward with a 60-day forward on the same underlying. A one-for-one hedge offsets spot exposure under the model. Which risk still needs analysis?

66.A desk expected a five-day holding period. The catalyst is delayed by a month, and its hedge ratio drifts as prices move. What adjustment should be evaluated?

67.A desk is long an ETF and short a basket meant to replicate it. The ETF uses sampling and publishes monthly holdings with a lag. What risk should it measure?

68.A trader runs two relative-value positions, both short the same sector ETF as a hedge. What should the portfolio risk check aggregate?

69.A spread strategy plans to trade $1.2 million of the long and short $900,000 of the hedge. The desk has a $2 million gross limit. How far is the planned trade over the limit?

70.A trader considers an extra hedge for a small residual position. The hedge would cost $800 and reduce the estimated cost of residual exposure by $500 over the trade horizon. No hard risk limit binds. What does that comparison favor?

71.A pair's spread has traded wider after one company permanently lost its largest customer. The desk's mean-reversion signal uses the prior year. What should the trader do first?

72.A gap tends to close after a quarterly rebalance. This quarter the index provider changes its inclusion rules and one leg is no longer eligible. What should the trader revisit?

73.A model expects a 40-basis-point gap to halve every five trading days. Costs are 24 basis points and the desk can hold for at most five days. What net edge does that simple path imply?

74.A spread starts 80 basis points from its modeled equilibrium and has a four-day half-life. Under a constant half-life model, how much of the gap remains after eight days?

75.A strategy expects $0.30 per unit if a catalyst occurs and loses $0.10 otherwise. Costs are $0.06 in either outcome. What catalyst probability breaks even?

76.A trader estimates a 65% chance of a $40,000 convergence gain and a 35% chance of a $30,000 loss. Costs are $4,000 in either case. What is expected net payoff?

77.A futures contract can be settled by delivering eligible inventory at a designated location. A cheap cash quote is for inventory elsewhere with no immediate transport available. What is missing from the trade?

78.A cash bond trades cheap to a deliverable futures contract. It is expensive to finance and another eligible bond may become cheaper to deliver. What scenario should the desk model?

79.A receipt trades at a premium to its local shares, but conversions into receipts are temporarily suspended. What can keep the gap open?

80.An ETF appears cheap to its basket. The desk cannot redeem directly and must rely on another firm that stopped transacting in the product. What should change in the thesis?

81.A trader sees a stable price difference between two bonds that share an issuer and maturity. One can be redeemed early on terms favorable to the issuer. What might explain the difference?

82.Two commodities track each other most of the year. Storage capacity for one is nearly full, and the other can be stored cheaply. What might sustain their new spread?

83.A hedge fund holds a crowded convergence trade. Several peers face redemptions and begin unwinding similar positions. What scenario should it test?

84.A position is expected to converge at settlement and shows positive terminal payoff in the model. A stress path requires $2 million of margin before settlement, but the desk can post only $1.3 million. What is the main issue?

85.A desk's short lender recalls the shares. The trader cannot replace the borrow before the buy-in deadline. What happens to the convergence plan?

86.A pair's historic correlation remains high after the spread begins drifting steadily in one direction. What does correlation alone fail to establish?

87.A z-score is large because the model uses a period of unusually low volatility to scale the gap. What should the trader verify?

88.A trade was sized for an event next week. The event is postponed without a new date. Borrow fees accrue daily. What is a defensible decision rule?

89.A trader's stop depends on the absolute spread widening by 30 cents. Fresh contract terms show the two instruments now differ in economic exposure, although the spread has widened only 10 cents. What action fits?

90.A fund compares a trade expected to earn 20 basis points in two days with a trade expected to earn 30 in a month. What else belongs in the ranking?

91.A spread widens after a central bank surprise. The long leg's market closes before the short leg's market. What is the best first diagnosis?

92.A cash-and-carry trade requires storing and delivering a commodity. Your desk secured storage but has not confirmed delivery capacity by the required date. What scenario is missing?

93.A firm sees a cheap foreign listing but faces restrictions on moving the securities and converting cash proceeds. What can explain a persistent gap?

94.A dealer quotes a spread that is unusually wide near quarter-end. Funding desks are reducing balance sheet. What should a trader test before assigning a quick convergence horizon?

95.A trade is up $6,000 from entry. From today's marks, expected incremental convergence is $2,000, additional costs are $1,100, and a new stress scenario exceeds a hard loss limit. What should guide the next step?

96.A paired stock trade depends on a merger closing, but the contract can be terminated. Which set of prices matters for the downside case?

97.A converging spread would earn $50,000 by expiry, but the trader must exit tomorrow due to a risk deadline. What payoff estimate belongs in the decision?

98.A model's trade signals work before borrowing and funding costs. The strongest signals occur when borrow is scarce. What backtest assumption would make the result more realistic?

99.A spread moved halfway toward the target. The original catalyst has passed and delivered less flow than expected. What should determine whether to keep the remainder?

100.A desk estimates a 60% chance a price gap closes within its hold window. If it closes the trade makes 18 basis points after costs. If it stays open and the desk exits, the trade loses 8 basis points after costs. What expected net return follows?

101.A trader claims an arbitrage because prices match at contract expiry in a model. The trade also requires continuous funding that can be withdrawn. What qualification belongs in the recommendation?

102.A historical pairs trade makes money only when entered one day before a scheduled earnings release. The dataset used actual report dates even when dates changed late. What should be checked?

103.A model says a gap will close in ten days. It was fitted using only trades that eventually converged. What does that sample selection omit?

104.A desk compares two gap trades. Trade A offers 30 basis points net and needs a single uncertain corporate event. Trade B offers 18 basis points net and has a verified conversion path with capacity. Which recommendation is defensible?

105.A relative-value trade passed on cost and hedge risk at entry. Which monitoring plan would support a decision to keep, resize, or close it?