Dealer Hedging Strategies refer to the systematic actions employed by market makers and liquidity providers in crypto options and RFQ markets to offset price exposure from client transactions. These strategies aim to minimize risk to the dealer’s proprietary capital by establishing neutralizing positions in underlying spot or derivative markets. Their primary purpose is to maintain a balanced risk book while facilitating client order flow.
Mechanism
When a dealer quotes a price or executes an option trade, they acquire a corresponding directional or volatility risk. To counter this, automated systems often generate dynamic hedging trades, such as buying or selling the underlying asset in the spot market or trading other derivatives. Delta hedging, gamma hedging, and vega hedging are common techniques that adjust the dealer’s portfolio sensitivity to market movements.
Methodology
The strategic approach involves sophisticated risk management systems that calculate real-time portfolio sensitivities and automatically execute offsetting trades. It requires continuous monitoring of market liquidity, execution costs, and available hedging instruments across various venues. This systematic process ensures that dealers can offer competitive prices and manage their own risk efficiently in volatile digital asset environments.
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