Inventory-skewed reservation price

You are making a market with the fair mid at $100. You are already long 10 units of inventory and want to quote around a reservation price that leans your quotes to shed risk. Your inventory penalty is q γ σ2Tq\,\gamma\,\sigma^2 T, where qq is your signed inventory, γ=0.1\gamma = 0.1 is your risk aversion, σ2=4\sigma^2 = 4 is the per-period variance, and T=1T = 1 is the horizon. At what price should you center your quotes (in dollars)?

Show hints (2)+
  1. Long inventory should push your quote center below the fair mid - decide the sign first.
  2. Reservation price r=mid−qγσ2Tr = \text{mid} - q\gamma\sigma^2 T.

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