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Related order

Contingent orders are the same as related trade orders.

Several types are available:

If Done (slave), where a slave order only becomes active if the primary order is executed.

One Cancels the Other (O.C.O.), where the execution of one order cancels the other.

Three-way contingent orders are also available where two orders are placed if (If Done) a primary order is executed.

These orders are themselves related as O.C.O. orders, allowing both a stop loss and a profit taking order to be placed around a position.

Resistance

The price level at which a rising price is expected to stall when market participants begin to sell the instrument. The opposite of resistance is support.

Risk management

Trying to control the outcome of a known or predictable range of gains or losses.

Risk management involves several steps, beginning with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business.

Then an assessment should be made of the types of variables that can affect the business and how best to protect it against unwelcome outcomes.

Risk management may be as simple as placing stop loss orders to prevent large losses, or as complex as hedging positions with Options or diversifying the portfolio to ensure that you are not overexposed to a single industry or instrument type.

Consideration must also be given to the preferred risk profile, that is, whether one is risk-averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk, and whether a natural hedge can be used.

Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.

Risk reversal

The simultaneous purchase of an out-of-the-money call (put) and the sale of an out-of-the-money put (call), usually with no up-front premium.

The Options bought and sold will have the same notional size and pre-defined maturity, and the deltas will typically be set to 25%.

According to Black-Scholes, the purchase and sale of Options with similar deltas (and so out-of-the-money forward to the same extent) should be zero cost. In practice, the market favours one side over the other.

In the simplest case, the implied volatility of out-of-the-money puts and calls of the same strike price and maturity date are different, and the extra cost of the favoured side is commonly known as the risk reversal spread.

This spread reflects the market's perception that the relevant probability distribution is not symmetrical around the forward, but skewed in the direction of the favoured side.

Another way of interpreting this is to say that implied volatility is correlated with spot, which is impossible in a Black-Scholes world.

Rollover

When a Spot Forex position is held at the end of the business day prior to its Value date, it will be rolled over to a new value date on a Tom/Next basis.

As part of the rollover, positions are subject to a swap charge or credit based on the LIBOR/LIBID interest rates of the two traded currencies with an added a mark-up of +/- 0.25% (for private accounts) plus an interest component for any unrealised profit/loss on the position.

Round turn

The commission includes both the opening and the closing of the position.

The alternative is a half-turn commission, which is charged per trade (that is, for both buy and sell).