Principal Model

A principal model is a mode of trading whereby a dealer commits its balance sheet, which means it uses its own inventory to meet client orders and to make gains or losses from trades.

The purpose behind principal trading is for firms (also referred to as dealers) to create profits for their own trading book through price appreciation.

In the “principal” model, the FX operators are counterparties to client transactions

They are essentially taking the other side of the trade. They can decide to not hedge the resulting risk, or hedge on an as-needed basis once certain overall risk limits have been reached.

A dealer will charge a bid-offer spread as compensation for the inventory risk it incurs.

Related Terms

Spread

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Bid-Offer Spread

Bid-offer spread measures the difference between the buy and sell prices.

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