Market-making by a foreign exchange dealer
An optimal liquidity model for pricing and hedging decisions is presented
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Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalisation), or trade with other dealers in the open market to hedge their position and reduce their inventory (externalisation). Alexander Barzykin, Philippe Bergault and Olivier Guéant propose an optimal control framework for market-making that tackles both pricing and hedging, thus
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