How Does a Principal-Based OTC Desk Manage Its Inventory Risk?

A principal-based OTC desk manages inventory risk by actively hedging its positions. When the desk takes the opposite side of a client's trade, it immediately acquires market exposure.

To neutralize this risk, the desk executes offsetting trades, often on public exchanges or with other dealers, to maintain a balanced inventory. This hedging process is crucial for managing the volatility and liquidity risk inherent in crypto assets.