ETF Market Making Exercises

Derivatives Theory ETF Pricing and How To Trade On Price Inefficiencies ETF Market Making Exercises

Market Making Trainer ~10 min

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Overview

The ETF Market Making Exercises train the arithmetic an ETF desk runs all day. Every stock has a market cap (price times shares), a basket is the sum of those market caps, and an ETF is worth that basket divided by its index ratio. From that one identity follow the three skills the exercises isolate: pricing (push a market cap shock through the ratio), hedging (size the stock, sub-ETF and total-ETF legs that flatten a position) and arbitrage spotting (compare the market bid and offer with fair value and take the edge). Each exercise is ten random questions with instant feedback and a worked solution. The scenario run strings the same moves into one timed session: build the baskets, price two ETFs, reprice on news, quote, get lifted, hedge, hunt the arbitrage, size to the thinnest leg and settle.

What's Covered

Price calculation Market cap = price × shares. Fair value = basket market cap / index ratio. A stock shock moves the ETF by its market cap change divided by the ratio.

Hedging One ETF share carries shares / index ratio of every component. Size stock hedges from that, and hedge one ETF with another on the same basket through the ratio of their index ratios.

Arbitrage spotting Buy when the offer sits below fair value, sell when the bid sits above it, make no trade when fair value is inside the market. The edge is the distance to fair value.

Scenario run One evolving ETF book run against the clock. Nothing is graded until the end; then every step comes back with your answer, the right one and the working.