New answers tagged market-making
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Is your trade on a liquid financial instrument; or is "related" to markets with idiosyncratic (and thus unhedgeable) funnies??? That makes a huge difference to the prices/odds/spread-differentials offered...
SOP is to simplify the complex into the closest approximating liquid options...
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The probablility of a jump of $J = \phi$. ( in either direction so I'll assume $\frac{\phi}{2} = $ probability of J and $\frac{\phi}{2} = $ probability of -J ). The probability of a jump of $0 = (1-\phi)$.
So, the expectation of the of jump amount, MM,
$ = E(MM) = \frac{\phi}{2} \times J + \frac{\phi}{2} \times -J + (1-\phi) \times 0 = 0$
The variance, $\...
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