Definitions Flashcards
Bond yields
Interest earned by investors who hold a bond until maturity. It represents the return generated by the bond investment. Usually expressed as a % of the bonds market value.
Influenced by inflation and credit risk
Critical mass in retail payments
The point at which a platform reaches a sufficient number of users or participants to become self-sustaining. Tipping point where the benefits of using the system outweigh potential drawbacks, leading to increased usage
Best Execution
Principle that requires financial intermediaries, to take reasonable steps to obtain the most favourable execution of client orders in terms of price, cost, speed, and likelihood of execution. It ensures that clients receive fair and optimal outcomes when their orders are executed.
Short squeeze
Where the price of a heavily shorted security increases rapidly, forcing short sellers to cover their positions by buying the security. This further drives up the price, creating a cycle that can lead to significant price volatility and potential losses for short sellers.
GameStop 2021 - several investors had taken short positions on GameStop’s stock, betting that the price would decline.
A group of individual investors on a Reddit forum saw an opportunity to squeeze the short sellers. They encouraged other retail investors to buy shares of GameStop, driving up the price and creating a short squeeze.
Loophole mining
Act of actively searching for and exploiting legal loopholes for personal gain or advantage. It could involve identifying gaps or weaknesses in laws, regulations, or contractual agreements and using them to achieve outcomes that may not have been intended by the parties involved. Sweep accounts
Restrictive covenants
Clause that limit or restrict certain actions or activities of one or more parties involved in the agreement. The purpose of restrictive covenants is to protect the interests of one party by prohibiting or limiting certain behaviours or actions of the other party. Used in employments and business contracts
Real vs Nominal IR
Cost of borrowing or return on an investment. Real IR = nominal IR - inflation
Nominal IR: amount of interest without adjusting for inflation.
Real IR: accounts for the effects of inflation by adjusting nominal rate to reflect changes in purchasing power.
2 sided payment platforms
A a type of platform that facilitates transactions between two distinct groups of participants: buyers and sellers. These platforms act as intermediaries, connecting buyers who seek goods or services with sellers who offer them. The platform enables the exchange of value between the two sides and often generates revenue through transaction fees or commissions.
Spoofing
Traders place orders with the intention to cancel or modify them before they are executed. The purpose of spoofing is to create a false impression of supply or demand in order to influence the price of a financial instrument or deceive other market participants.
Debt inflation
Where the value of debt is in an economy is growing at a faster rate than the general level of inflation. Real burden of debt increases
Credit spreads
Difference in interest rates between two types of debt securities. Represents the additional yield or interest rate that investors require to hold a riskier bond compared to a less risky bond with a similar maturity. Credit spreads are an important indicator of credit risk associated with a debt instrument.
Benchmark manipulation
Altering or manipulating benchmark results to misrepresent performance or deceive others.
Manipulation of the London Interbank Offered Rate (LIBOR) by several banks.
Involved banks submitting false rates. The purpose of the manipulation was to benefit the banks’ trading positions and to create a perception of financial strength during the financial crisis and subsequent periods.
Direct finance
borrowers borrow directly from
lenders in FM through debt instruments e.g. bonds. Can be through primary and secondary markets
Primary market - newly issued securities sold to investors for the first time.
Secondary market - trading of existing securities between investors
Promotes economic efficiency by producing an efficient allocation of capital which increases production. Improves the well being of consumers by allowing them to time purchases better
L1
Indirect finance
Funds transferred from savers to borrowers through financial intermediaries such as banks.
EoS: reduces transaction costs and enhances liquidity.
Risk sharing: reduces risk exposure by spreading returns earned on risky assets. Pools assets into new safer assets.
Expertise: expertise in monitoring borrowers reduces risk of losses due to moral hazard
Financial intemediaries
institutions that borrow funds from people who have saved and make loans to people who need funds e.g. banks
Financial crises
Disruptions in FM characterised by sharp declines in asset prices and failures of firms. Uncertainty and instability in FM. Leads to unemployment, recessions, high levels of debt.
Global financial crisis (2007-9) : Collapse of the housing market and exposure of risky mortgage backed securities. Mortgage lending increased particularly to borrowers with poor credit ratings. Borrowers defaulted on payments causing losses for financial institutions. Led to a global recession - unemployment, lower economic output, lower confidence and government debt increase
Financial Innovation
Development of new financial products & services. Makes the financial system more efficient.
Fintech: uses technology to improve financial services. Includes mobile banking, P2P lending
Credit union
Member owned not for profit organisations that serve their members needs. Have requirements to join e.g. employment. Profits reinvested into union to provide lower fees.
Navy federal credit union open to retired military personnel.
Hedge funds
Privately managed investment funds that pool capital from high net worth individuals to invest. Charge performance fees - % of profits and management fees. Bridgewater associates one of the largest hedge funds.
Mutual funds
Pool money from investors to invest in a diversified portfolio of securities such as stocks and bonds. Managed by professional fund managers. Cheaper than hedge funds. Risk and return varies on investing strategies.
Black rock
Collateral
An asset that is provided as a security to obtain a loan. Form of protection for the lender in case borrower defaults.
Real estate or vehicles
Lemons problem
Explains how asymmetric information between buyers and sellers affects economic behaviour. If quality cannot be assesses, buyer is willing to pay at most a price that reflects average quality. Sellers of good quality items will not want to sell at the average price and thus will exit the marker. All that is left is poor quality items
Adverse selection
One party in a transaction has more information than the other party, leading to an imbalance of information and potentially unfavorable outcomes for the party with less information.
Moral hazard
One party is incentivized to engage in undesirable behavior because they are cautious of potential negative consequences of their actions. It arises when one party has asymmetric information or a lack of accountability, leading to behavior that may be detrimental to the other party
Unsterilized foreign exchange intervention
Domestic currency is sold to purchase foreign assets to a gain in international reserves, an increase in the money supply and a depreciation of the domestic currency
Sterilized foreign exchange intervention
Instead of decreasing monetary base. The fed can purchase gvt bonds which would increase monetary base. With no effect on money supply and interest rate, any (assumed) rise in the exchange rate will cause an excess supply of dollars as more people now want to sell than buy. In the long-term, the exchange rate in a sterilized intervention falls back to around the previous level.
Speculative attacks
Speculators sell a country’s currency, aiming to profit from a potential devaluation or depreciation. Speculative attacks typically occur when there are concerns about the stability or credibility of a country’s exchange rate regime.
September 1992 crisis that rocked the EMS. To tackle inflation, the German Central Bank raised interest rates significantly
The German central bank was more concerned about tackling inflation= unwilling to pursue expansionary monetary policy. Meanwhile, the UK was facing post-war recession= unwilling to pursue contractionary policy to prop up the Pound.
Policy Trilemma
Option 1 have capital mobility and an independent monetary policy, but not a fixed exchange rate. The Eurozone and the United States have made this choice.
Option 2 there is free capital mobility, and the exchange rate is fixed, so the country does not have an independent monetary policy. Countries like Hong Kong and Belize have made this choice.
Option 3 have fixed exchange rates and pursue an independent monetary policy, but not have free capital mobility due to capital controls & restrictions on the free cross-border movement of capital as in China
