Explain the Difference between ‘Theoretical Price’ and ‘Quoted Price’ in an RFQ.
The theoretical price is the calculated fair value of the option derived from a pricing model (like Black-Scholes) using current market inputs. The quoted price is the actual price offered by the market maker in the RFQ, which is the theoretical price adjusted by a profit margin that covers transaction costs, risk premium, and the market maker's desired profit.
Glossar
Theoretical Price
Pricing ⎊ Theoretical Price is the calculated fair market value of a derivative instrument, such as a futures contract or an option, derived from a no-arbitrage principle using a foundational financial model.
Quoted Price
Offer ⎊ The quoted price represents the current standing bid or ask price disseminated by an exchange or dealer for a derivative contract, signifying an immediate, though conditional, willingness to transact.