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Quotes that follow inventory

Market makingHard

Fair value is fixed at . A market maker quotes bid = and ask = , where is the current inventory in units (negative when short). Starting from , a counterparty sells to the bid, then sells to the new bid, then buys from the new ask, then sells to the new bid, one unit each time, with quotes updated after every trade. What is the total profit after the last trade, with the inventory marked at ?

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A whole number, a decimal, a fraction like 3/8 or a percent.

Hint

Track the inventory and recompute both quotes after each fill.

Solution
  1. Buying at (q = ), then at (q = ), then selling at (q = ), then buying at (q = ).
  2. Cash is and the final inventory is units worth .
  3. The total profit is .

Answer: