Inventory Risk

Status Draft briefPart Market Making

Fills create inventory whose value changes with the market. Inventory-aware quoting trades expected spread capture against exposure and liquidation risk.

Central questions

• How should quotes skew as inventory approaches a limit?
• Which horizon and covariance define exposure risk?
• When should inventory be hedged elsewhere rather than through quotes?

Planned model

Accumulate inventory under stochastic fills and prices, then compare symmetric quoting, inventory skew, hard limits, and external hedging.