Daily trading limit

Daily trading limit is the maximum amount, set by the exchange that the price of a stock, commodity or futures/options contract can rise or fall in a single day.

It is the maximum gain or loss on a derivative contract, such as options and futures contracts that is allowed in any one trading session. Derivatives, currencies, and commodities can be extremely volatile investments. In order to prevent this volatility from spiralling out of control, options and futures exchanges enact daily trading limits stating that a security cannot rise or fall more than a certain percent in a given trading day. Trading in an asset is automatically suspended when the daily limit is reached.

Kaizen

Kaizen is a system of continuous improvement in quality, technology, processes, company, culture, productivity, safety and leadership.

Kaizen is Japanese term for "improvement" or "change for the better". It comes from the Japanese words 改 ("kai") which means "change" or "to correct" and 善 ("zen") which means "good". Kaizen was created in Japan following World War II.

It refers to philosophy or practices that focus upon continuous improvement of processes in manufacturing, engineering, supporting business processes, and management. It has been applied in healthcare, psychotherapy, life-coaching, government, banking, and many other industries. When used in the business sense and applied to the workplace, kaizen refers to activities that continually improve all functions, and involves all employees from the CEO to the assembly line workers. It also applies to processes, such as purchasing and logistics that cross organizational boundaries into the supply chain.

Everyone is encouraged to come up with small improvement suggestions on a regular basis. This is not a once a month or once a year activity. It is continuous. In Japanese companies, a total of 60 to 70 suggestions per employee per year are written down, shared and implemented. Suggestions are not limited to a specific area such as production or marketing. Kaizen is based on making changes anywhere that improvements can be made.

Kaizen involves setting standards and then continually improving those standards. To support the higher standards Kaizen also involves providing the training, materials and supervision that is needed for employees to achieve the higher standards and maintain their ability to meet those standards on an on-going basis.

Absolute advantage theory

Absolute advantage theory is introduced by the Scottish economist Adam Smith (1723-1790).

Adam Smith, in The Wealth of Nations, postulated that under free trade, each nation should specialize in producing those goods that it could produce most efficiently. Some of these would be exported to pay for the imports of goods that could be produced more efficiently elsewhere.

The theory of absolute advantage is based on the assumption that the nation is absolutely better (i.e., more efficient) at production of certain goods than are its trading partners.

Smith argued that it was impossible for all nations to become rich simultaneously by following mercantilism because the export of one nation is another nation’s import and instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage.

Microinsurance

Microinsurance is insurance with low premiums and low caps / coverage. Microinsurance is a financial arrangement to protect low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. It does not refer to: (i) the size of the risk-carrier (some are small and even informal, others very large companies); (ii) the scope of the risk (the risks themselves are by no means “micro” to the households that experience them); (iii) the delivery channel: it can be delivered through a variety of different channels, including small community-based schemes, credit unions or other types of microfinance institutions, but also by enormous multinational insurance companies, etc.

Microinsurance links multiple small units into larger structures, creating networks that enhance both insurance functions (through broader risk pools) and support structures for improved governance (i.e. training, data banks, research facilities, access to reinsurance etc.). This mechanism is conceived as an autonomous enterprise, independent of permanent external financial lifelines, and its main objective is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks.

Giffen good

A Giffen good is an extreme type of inferior good. A good that is so inferior and so heavily consumed at low incomes that the demand for it rises when its price rises The negative income effect of changes in price of a Giffen good is actual stronger than the substitution effect. An inferior good for which the negative income effect outweighs the substitution effect so that the demand curve is positively sloped.

Safe harbour rule

Safe harbour rule is a  legal concept whereby a person who has meet the required listed rules and requirements is protected from any adverse legal proceedings. It is a legal provision to reduce or eliminate liability as long as good faith is demonstrated.

Safe harbours tend to be applied where any legal restrictions and/or requirement are ambiguous and therefore carry a risk of being punished for a violation which was unintended.

Sacrifice ratio

Sacrifice ratio measures the costs associated with slowing down economic output to change inflationary trends. Sacrifice ratio is the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.

The ratio is calculated by taking the cost of lost production and dividing it by the percentage change in inflation, and its quotient gives the loss of output per 1% change in inflation:

Sacrifice ratio = Dollar Cost of Production Loss/Percentage Change in Inflation

Historical cost vs. market (fair) value

According to GAAP, assets and liabilities have been recording through historical cost accounting: a system where assets and liabilities are recorded and presented at the monetary amount paid or the consideration given at the time of their acquisition. But it possess some strong flaws in context of the contemporary business environment which have made accounting bodies, especially FASB & IASB, to search for a number of alternative accounting methods. One of these alternatives is market or fair value accounting that has been thinking as the best alternative to the historical cost accounting. The market value of an asset (liability) is the amount at which that asset (liability) could be bought or sold (incurred or settled) in a current transaction between willing parties.

As historical cost accounting is based on actual transactions, the recorded amounts are reliable and verifiable and free from management bias. Historical cost accounting leads to absolute certainty and it fits in perfectly with the cash flow statement. It tells exactly what has been paid or received and therefore there is no doubt about balance sheet amounts.

Historical cost helps the managers to forecast future operational cost based on past data. Without knowing the original cost, future projections are almost hampered. Under historical cost accounting, there is no scope for manipulation, because the data is supported by sufficient evidences such as: invoices, receipts etc.

However historical costs do have their own limitations. The strongest argument against historical cost accounting is it does not provide information that is relevant to investors. Intangible assets acquired outside of business combination (internally generated) are not reported in historical financial statements. Reliable forecast of the future income effects of a financial instrument is unlikely to be possible from the simple extrapolation of past gain and losses based on historical cost.

Proponents of market value accounting argues that this measurement is more relevant than historical cost as it provides up-to-date information consistent with market and as it takes into account the inflationary adjustment to the acquired cost. Critics have argued that this method increases volatility and thus reduces stock price. But its proponents contend that market value reveals economic realities that are hidden by historical cost accounting. The patrons of market value accounting have been continuing their supports to it for its following advantages:

Market value measurement is more relevant to investors and creditors as it reflects the current market price of an asset or liability. It provides more transparency to users. Measurement of financial assets and liabilities at market value in the balance sheet should better capture an entity’s exposure to risk and increase its visibility in the balance sheet.

The market value dissenters argue that the information provided by market value financial statements is unreliable; because it is not based on arm’s length transactions & there is a huge possibility for management to manipulate the bottom line. They contend that if the information is unreliable, it should not be used to make financial decisions.

Some critics are concerned that the precipitous adoption of market value accounting will have adverse effect on both banks and the financial system as a whole. These critics believe that earnings based on market values for investment securities are likely to be more volatile than those based on historical cost.

Market values are basically based on unverifiable subjective estimates of managers. When quoted market price for an asset or liability is not available, market value is measured based on an estimate by using the best information and techniques available in the circumstances.

Although historical cost accounting has some distinguishing features for which its patrons think it better method for measuring assets and liabilities, it can’t provide relevant information to investors. Market value accounting can able to eliminate this limitation by providing current and inflation adjusted information to investors. Therefore, market value is the best alternative to historical cost. But there are also several significant problems within market value accounting in its current application which make more users reluctant to use market value in measuring assets and liabilities.

As investors are the major users of financial statements, priority should be given to their wants, that is, which measurement they prefer- historical cost or market value. Empirical evidences show that investors want both measurements. They want reliable and transparent market value information to determine the actual value of their investment. They also want historical cost information that helps them to determine whether management has discharged the stewardship entrusted to them. Therefore, assets and liabilities should be measured and reported at market value and these measurements must be reliable, verifiable &transparent and these measurements should not be at the cost of abandoning historical cost information.

Pareto optimal allocation of resources

Given an initial allocation of goods among a set of individuals, a change to a different allocation that makes at least one individual better off without making any other individual worse off is called a Pareto improvement. An allocation is defined as "Pareto efficient" or "Pareto optimal" when no further Pareto improvements can be made.

Pareto efficiency is a minimal notion of efficiency and does not necessarily result in a socially desirable distribution of resources, as it makes no statement about equality or the overall well-being of a society.