Dealing with multi-currency inventory risk in foreign exchange cash markets
A market-making model that considers correlation, transaction costs and market impact is presented
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In foreign exchange cash markets, market-makers provide liquidity to clients for a wide variety of currency pairs. Because of flow uncertainty and market volatility, they face inventory risk. To mitigate this risk, they typically skew their prices to attract or divert the flow and trade with their peers on the dealer-to-dealer segment of the market for hedging purposes. Alexander Barzykin, Philippe Bergault and Olivier Guéant offer a mathematical framework to
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