Thursday, July 14, 2011

K percent rule

According to K percent rule the money supply should be increased at a constant percentage rate year in and year out, irrespective of cyclical changes in national income.

According to Milton Friedman "The stock of money [should be] increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs." (Friedman 1960) Giving governments any flexibility in setting money growth will lead to inflation according to Friedman. The main policy to be avoided is countercyclical monetary policy, the standard Keynesian policy recommendation at the time. For this reason, the central bank should be forced to expand the money supply at a constant rate, equivalent to the rate of growth of real GDP.

Wednesday, July 13, 2011

Derivative instruments

A derivative is a financial instrument whose value depends on underlying variables. The most common derivatives are futures, options, and swaps but may also include other tradable assets such as a stock or commodity. A derivative is essentially a contract whose payoff depends on the behavior of a benchmark.

Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives); the market in which they trade (e.g., exchange-traded or over-the-counter); and their pay-off profile.

Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.


Tuesday, July 12, 2011

Arms index

The Arms Index, also known as TRIN, an acronym for TRading INdex, was developed in 1967 by Richard Arms. It is a volume-based indicator, which determines market strength and breadth by analysing the relationship between advancing and declining issues and their respective volume; it is used to measure intra-day market supply and demand, and it can be applied over short or longer time periods.

The index is calculated using the following formula:


Arms index or TRIN= (number of advancing issues)/ (number of declining issues) (Total up volume)/ (total down volume).

An index value of 1.0 indicates that the ratio of up volume to down volume is equal to the ratio of advancing issues to the declining issues. The market is said to be in a neutral state when the index equals 1.0 since the up volume is evenly distributed over the advancing issues and the down volume is evenly distributed over the declining issues.


Friday, July 8, 2011

Market conversion price

Market conversion price is the price that an investor effectively pays for common stock by purchasing a convertible security and then exercising the conversion option. This price is equal to the market price of the convertible security divided by the conversion ratio.

Conversion ratio is the number of shares of common stock one receives by exercising the conversion option. In order for the exercise of the option to be worthwhile, the market conversion price must be lower than the market price of common stock. It is also called the conversion parity price and the conversion value.


Thursday, July 7, 2011

Deadweight loss

In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product. Deadweight loss can be beneficial when there is a negative externality, in which case it can be considered a deadweight gain, as it would help those that the negative externality was hurting.

Causes of deadweight loss can include monopoly pricing, externalities, taxes or subsidies, and binding price ceilings or floors. The term deadweight loss may also be referred to as the "excess burden" of monopoly or taxation.


Wednesday, July 6, 2011

Free Riding

Free Riding means getting the benefit of a good or service without paying for it. This may be possible because certain types of goods and services are actually hard to charge for--a firework display, for instance. Free riders are those who consume a resource without paying for it, or pay less than the full cost of its production.   However, there can sometimes be a free-rider problem, if the number of people willing to pay for the good or service is not enough to cover the cost of providing it. In this case, the good or service might not be produced, even though it would be beneficial for the economy as a whole to have it. Free riding is usually considered to be an economic "problem" only when it leads to the non-production or under-production of a public good, or when it leads to the excessive use of a common property resource.  Public goods are often at risk of free riding. The free rider problem is the question of how to limit free riding (or its negative effects) in these situations.  The problem can be overcome by financing the good by imposing a tax on the entire population.


Tuesday, July 5, 2011

Information coefficient

Information coefficient is the correlation between predicted and actual stock returns, sometimes used to measure the value of a financial analyst. It is a measure of the correlation between expected and actual returns. The IC is used internally within a firm to judge the performance of individual financial forecasters. The IC is measured on a scale between 0 to 1, with 1 indicating no difference between expected and actual returns. An IC of 1.0 indicates a perfect linear relationship between predicted and actual returns, while an IC of 0.0 indicates no linear relationship.




Monday, July 4, 2011

Omnibus account

Omnibus account is an account carried by one futures commission merchant with another futures commission merchant in which the transactions of two or more persons are combined and carried in the name of the originating broker, rather than designated separately. It is an account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined in this type of account, allowing for easier management by the futures merchant.


Friday, July 1, 2011

Debt swap

Debt swap is a set of transactions in which a firm buys a country's dollar bank debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local equity.  

A company can undergo some financial restructuring for long term success. One possible way to achieve this goal is to issue a debt/equity or an equity/debt swap. In the case of an equity/debt swap, all specified shareholders are given the right to exchange their stock for a predetermined amount of debt (i.e. bonds) in the same company. A debt/equity swap works the opposite way: debt is exchanged for a predetermined amount of equity (or stock). The value of the swap is determined usually at current market rates, but management may offer higher exchange values to entice share and debt holders to participate in the swap. After the swap takes place, the preceding asset class is cancelled for the newly acquired asset class.
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