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Symmetric or skewed? Compare the two books

You're long 4,0004{,}000 shares of a stock worth 20.0020.00 whose position P&L has per-share variance σ2=0.04\sigma^2 = 0.04 dollars2^2 (so \sigma = \0.20$). You're choosing between two quoting styles for the next interval:

  • Symmetric: quote 19.9619.96 / 20.0420.04. Expected spread income \60,butyourpositionstaysaround, but your position stays around q = +4{,}000$.
  • Skewed: quote 19.9319.93 / 20.0120.01. Expected spread income \40(thinneredgeontheeagersellside),buttheleanisexpectedtocutyourpositiontoabout(thinner edge on the eager sell side), but the lean is expected to cut your position to aboutq = +1{,}500$.

Score each with the risk-adjusted objective U=E[profit]γ2σ2q2U = E[\text{profit}] - \tfrac{\gamma}{2}\,\sigma^2 q^2, using risk aversion γ=0.0005\gamma = 0.0005.

Which strategy wins, and why?

Your answer

This one is open-ended. Work it through, then check your reasoning against the full solution.

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