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Dealing with multi-currency inventory risk in FX cash markets

Author

Listed:
  • Alexander Barzykin

    (HSBC)

  • Philippe Bergault

    (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

  • Olivier Guéant

    (UP1 - Université Paris 1 Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

In FX 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. This paper offers a mathematical framework to FX dealers willing to maximize their expected profit while controlling their inventory risk. Approximation techniques are proposed which make the framework scalable to any number of currency pairs.

Suggested Citation

  • Alexander Barzykin & Philippe Bergault & Olivier Guéant, 2022. "Dealing with multi-currency inventory risk in FX cash markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-03857966, HAL.
    • Handle: RePEc:hal:cesptp:hal-03857966
    as

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    Cited by:

    1. Zhou Fang & Haiqing Xu, 2023. "Over-the-Counter Market Making via Reinforcement Learning," Papers 2307.01816, arXiv.org.

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