Showing posts with label Investopedia. Show all posts

TERM OF THE DAY - MAY 06TH, 2008

Rio Hedge

What Does it Mean?
A situation where a trader who is facing financial or legal troubles hedges his or her position in an investment with a ticket to a tropical location. The idea behind the Rio hedge is that if the investment goes bad (either legally or through financial loss) the investor will use the ticket to escape.

Investopedia Says...
The Rio hedge is a joke in the investment community regarding the risks involved in trading. A traditional hedge will protect against potential financial risks associated with an investment. The Rio hedge pokes fun at protecting against risks, such as getting caught by the authorities, lenders, or owners of the funds under management.

NoeL

TERM OF THE DAY - MAY 5TH, 2008

Fool In The Shower

What Does it Mean?
A phrase used to describe the idea that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once. It describes a scenario where a central bank, such as the Federal Reserve acts to stimulate or slow down an economy. When the first stimulus is made, the effect may not be immediate, which can cause decision makers to increase the magnitude of the change, eventually causing too much stimulus.

Investopedia Says...
The phrase is attributed to Nobel laureate Milton Friedman, who likened a central bank that acted too forcefully to a fool in the shower. When the fool realizes that the water is too cold, he turns on the hot water. However, the hot water takes a while to arrive, so the fool simply turns the hot water up all the way, eventually scalding himself.

Any change made to stimulate a broad economy, especially one as large as the U.S. takes time to work its way through. A move like lowering the fed funds rate takes about six months to fully integrate into the economy. Therefore, economists are always cautious about overreaching and prefer small consistent steps to enact change.

NoeL

TERM OF THE DAY - MAY 4TH, 2008

Harvard MBA Indicator

What Does it Mean?
A long-term stock market indicator that evaluates the percentage of Harvard Business School graduates that accept "market sensitive" jobs in fields, such as investment banking, securities sales & trading, private equity, venture capital and leveraged buyouts. If more than 30% of a year's graduating class take jobs in these areas, the Harvard MBA Indicator creates a sell signal for stocks. Conversely, if less than 10% of graduates take jobs in this sector, it represents a long-term buy signal for stocks.

Investopedia Says...
Started and maintained by consultant and HBS graduate Roy Soifer, the Harvard Indicator gave sell signals in 1987 and in 2000, which were both terrible years for the stock market. The esoteric indicator is meant to represent long-term signals based on the relative attractiveness of Wall Street jobs. The more grads that are enticed to go there, the more bloated Wall Street becomes and the more likely the market is nearing a top. When stock markets are doing poorly, fewer grads want to enter the sector. This indicator runs on a similar theme to the old market adage that when everyone else is looking to get in, it's time to get out.

NoeL

TERM OF THE DAY - MAY 02, 2008

Currency Carry Trade

What Does it Mean?
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates - which can often be substantial, depending on the amount of leverage the investor chooses to use.

Investopedia Says...
Here's an example of a "yen carry trade": a trader borrows 1,000 yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% (4.5% - 0%), as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar was to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless hedged appropriately.

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.:NoeL:.

From today, i will be putting up one Finance Term each here in my blog for your reference. This will in improving the knowledge in field of Finance.
Courtesy : Investopedia

NoeL