Time-Weighted Inventory is a measure of a market maker’s or trader’s inventory of an asset, adjusted to account for the duration each unit of the asset has been held. This approach prioritizes older positions or longer holding periods in risk calculations, providing a more granular view of exposure than a simple sum of holdings.
Mechanism
Rather than simply aggregating current holdings, a time-weighted inventory calculation applies a specific weighting factor based on how long each component of the inventory has been present in the portfolio. For example, inventory held for extended periods might receive a higher risk weight due to potential for stale pricing or increased market drift. This calculation yields a more nuanced view of overall exposure, particularly for assets with fluctuating values or liquidity.
Methodology
The strategic objective is to provide a more accurate assessment of risk associated with stagnant or long-held positions, which may possess different liquidity profiles or mark-to-market exposures compared to recently acquired assets. This methodology aids in identifying and managing stale inventory, thereby preventing the accumulation of unmanaged risk within trading operations. Its framework supports proactive inventory management by highlighting positions that require rebalancing or hedging based on their duration and potential for adverse price drift.
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