Market Making Cross Hedge Interview
Market making cross hedge interview guide for using imperfect related instruments, correlation, basis risk, and residual exposure.
Candidates asked about imperfect hedge choices.
A cross hedge is approximate
A cross hedge uses a related instrument when the exact exposure cannot be hedged directly. It reduces risk only to the extent the relationship holds.
Correlation drives usefulness
The more strongly related the hedge instrument is to the exposure, the more useful the cross hedge may be.
Concrete example
If you cannot hedge a specific event directly, a related market may offset part of the exposure, but mismatch can remain.
Basis risk remains
Basis risk is the risk that the hedge and original exposure move differently. Name it when proposing a cross hedge.
Quote impact
If only an imperfect hedge is available, the original quote may need more spread or smaller size.
Common mistakes
Candidates often treat correlated as identical. A cross hedge reduces risk; it rarely eliminates it in toy reasoning.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.