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Hi All,I have the following problem:Suppose, a trader wants to buy instrument A but required quantity is not available in market. Now he consumes the available liquidity and for rest of the quantity of A he buys alternative intstruments (say B, C, D with equivalent exposure). Now over a period of time trader wants to sell these B, C or D and obtain A. Question is: How can we do this such that we can minimize the impact cost and expected variance?Your feedback would be a great help for me.Regards,Gaurav

QuoteOriginally posted by: gauravkumar2Suppose, a trader wants to buy instrument A but required quantity is not available in market. Now he consumes the available liquidity and for rest of the quantity of A he buys alternative intstruments (say B, C, D with equivalent exposure).You should never buy the full equivalent exposure. The utility of the last marginal unit of A is less than the incremental cost of random factors or volatility introduced by B, C, and D.Or put better, suppose A is so beneficial that I want to own 100 shares. 100 shares combining A, B, C, and D is less beneficial. So I will only want to own 75 shares of this combination at the outset.You should not always put on a full hedge.

Thanks for the reply. But,1. how will I do that2. How will I decide the proportion of B, C, and D?Regards,Gaurav

Just as a guess, you probably want to sweep them with orders all at the same time. Otherwise by the time you are done buying the first one, some pairs trader will have already marked up the second one.Or maybe you could hide your orders inside noisy moments in the price series correlation.

Thanks for the reply.Could you please refer me some research paper? It would be a great help for me.Regards,Gaurav