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014

Case 014Market-making gamesHard

A contract settles at a die roll, doubled if a coin lands heads, plus 5 if a drawn card is red. Quote it, then decide whether to trade with a bot showing 9.5 bid, 10.5 offer, and whether to make or take.

OptiverAustin · 2025

1The situation

In Tessaline Capital's trading round the interviewer will roll a fair die, flip a fair coin and draw one card from a full shuffled deck. The contract settles at the die's value, doubled if the coin lands heads, plus 5 if the card is red. Nothing has been revealed yet.

First you are asked for a two-way price. Then a trading bot appears, showing a market of 9.5 bid and 10.5 offer for up to 10 contracts, and you can trade with it or post your own quote alongside it.

2Your task

What is the contract worth, what market would you make, and what do you do with the bot: trade or not, buy or sell, make or take?

Quick check

Before any maths: what is the contract's fair value?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Fair value is 7.75, so sell to the bot at 9.5: take its bid, do not join its market. The die is worth 3.5, the coin's doubling 1.75 and the card 2.5. The bot's bid is 1.75 rich, about 0.43 standard deviations of the outcome per contract. Even a coin that always landed heads would only make the contract worth 9.5, so only a stacked deck could justify the bot's price. Sell the 10 offered and re-quote around 7.75.

Step 1How do you price a contract with three moving parts?

Break it into pieces and use the fact that expectations add. The die averages 3.5, heads adds another 3.5 half the time, worth 1.75, and a red card adds 5 half the time, worth 2.5, so fair value is 7.75. The doubling is the only step that needs care: it multiplies the die, so its value is the die's average times the chance of heads, which works because die and coin are independent. A shop running a festival offer, double points on weekends plus a flat bonus for paying by card, prices it the same way: average base, plus average uplift, plus average bonus.

Price each piece, add them, then compare with the botFair valuedie 3.5coin +1.75card +2.5= 7.75Bot's marketbid 9.5offer 10.5sell at 9.5: +1.75 a contract024681012
The die is worth 3.5, the coin's doubling adds 1.75 and the red card adds 2.5, so fair value is 7.75; the bot's whole market, 9.5 at 10.5, sits above it, which makes its bid a sale rather than a market to join.
Step 2What two-way price would you show before the bot arrives?

Centre on 7.75 and set the width from the risk. Of 24 equally likely outcomes, the settlement runs from 1 to 17 with a standard deviation of about 4.07. A market of 7 at 8.5 is tight enough to show you know the value and wide enough to protect you if the interviewer knows something, such as which card is on top. In a game with no informed counterparty you can quote tighter; if they hint that they have peeked, widen and lean.

Step 3What do you do with the bot's 9.5 bid?

Sell to it, and take rather than make. Hitting the 9.5 bid earns 1.75 a contract in expectation, and posting your own offer at 8.5 would let the bot buy from you a whole point cheaper. Joining its market at 9.5 at 10.5 would mean offering at a price where no one rational buys. Selling all 10 lots earns an expected 17.5, against a standard deviation of about 12.9 on the position, so the trade can still lose: the contract settles above 9.5 in 8 of 24 outcomes, 33% of the time.

Where the contract can settle: 24 equally likely outcomes1/242/243/24fair 7.75bot bids 9.5: settles above it 8 times in 241357911131517Settlement value: die, doubled on heads, plus 5 on a red card
Across the 24 equally likely combinations the contract settles anywhere from 1 to 17, centred on 7.75, and finishes above the bot's 9.5 bid in 8 of them, so selling at 9.5 is a positive-expectation trade that still loses about 33% of the time.

Before you sell, ask the one question that could make the bot right. Is the deck full and the coin fair? Even if the coin landed heads every time, the contract would be worth 3.5 times 2 plus 2.5, exactly 9.5, so the bot's bid needs either a coin that cannot land tails and a deck that favours red, or rules you have misread. Saying this out loud shows the interviewer you checked whether the price is information before treating it as a gift. Then trade, and as the die, coin and card are revealed, reprice each piece and update your quote.

Where candidates lose it

The usual loss is anchoring on the bot. Candidates see 9.5 at 10.5, decide fair value must be about 10, and either buy at 10.5 or quote around 10 themselves, handing the bot a point and a half a contract.

The second is mishandling the doubling, either adding 3.5 for the coin instead of 1.75, which gives 9.5 and makes the bot look fair, or doubling the card's 5 as well. The coin multiplies only the die.

What the interviewer asks next

  • The die is revealed as a 2. What is the contract worth now, and where do you quote?
  • The bot keeps bidding 9.5 after you sell 10. How many more do you sell, and what stops you?
  • How would your quote change if the interviewer says they have seen the card?
  • What is the fair value if the coin triples the die instead of doubling it?

Asked at Optiver, Quantitative Research, Austin, 2025 (Wall Street Oasis): Technical (Simulated EV Poker like game, with cards, coins and dice; Market Making and Taking)

← Case 013An equally weighted index of ten stocks has implied volatility 18% while each member's implied is 30%. Compute the implied correlation and the sign of P&L for selling index volatility and buying member volatility if realised correlation is 0.25.Case 015 →A fund holds Rs 50 crore of stocks with a portfolio beta of 1.3 and wants to be market neutral with index futures. How much notional should it short, and what risk remains?

Company names and figures are illustrative.

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