| September 9, 2010
Currency Swap
While not the same as a liquidity swap, a currency swap is related to what are known as interest rate swaps. The way in which these swaps happen could be one of three ways to include the following:
1. The first way in which a currency swap works is actually simple. With this, only the loan’s principal would be exchanged and at a rate already agreed on by both parties. This type of agreement provides a function that is equivalent to a futures or forward contract. The only downside is that because there is a higher expense in finding the other party and getting the needed documents created, it is costlier than the other two currency swap options. Because only principal is involved, spreads are wider for alternative derivatives so this ends up being a cost effective currency swap.
2. The second option for handling a currency swap is by exchanging the principal of the loan but in this case, it would be conducted with an interest rate swap. This means that interest cash flows would not be netted prior to being paid to the other party. The reason is that these cash flows would be denominated in more than one currency. Therefore, each party involved with the currency
swap would borrow on the other party’s behalf. The more common name of a currency swap such as this is “Back-to-Back Loan.”
Exchange Traded Fund (ETF)
A type of investment on stock exchanges is called the Exchange Traded Fund (ETF), although some people in the financial world refer to this trade as the Exchange Traded Product (ETP). Similar to other stocks, this particular one is designed to hold assets to include stocks, as well as bonds and trades for a price around the same as the net asset value of the underlying asset or assets. These stocks or bonds would be held throughout the day, which are tracked in most cases on the index to include the MSCI EAFE or S&P 500. They are an alternative to mutual funds but with lower fees and the ability to buy and sell in smaller units and at any point that the market is open.
Economic Statistics
There is a lot of FUD (Fear Uncertainty Doubt) going around markets, an environment that is uncomfortably similar to 2008. How do you understand what is really going on? Economic Statistics give us a real data on what is happening in the economy, rather than the often self-interested opinions of talking heads on TV.
What is Distressed Debt?
What is Distressed Debt? There is a market in the debt (borrowings) of companies (and quite possibly countries) where the borrowing entity is having problems repaying that debt. These contracts can be bought and sold in secondary markets or private transactions.
Economic Recovery?
World stock markets are acting as if the Great Recession is over, and yet there is mass unemployment across the US and Europe, and the debt loads of countries look increasingly untenable, so just how stable really is the world economy?
Debt
Governments, and in particular western governments, have borrowed vast amounts of money to pay for bailouts and stimulus packages. This mountain of debt is growing. The IMF estimates that public debt as a percentage of GDP for OECD will rise from 78% in 2007 to 114% in 2014 - just as the greying population puts even more strain on budgets.
Personal Finance
Is it time to look at your personal finances again?
You have probably increased your savings and want to reduce your debt. Looking at mortgage refinancing is one way to reduce your monthly mortgage payments, while a new credit card deal could help you to reduce the interest rate on any outstanding debt.
Most investors have had a terrible year, but the markets have been on a tear since March, and there are still a lot of comparative bargains out there. It might be time to start tentatively thinking about investing again.
But now that we understand the issues, a bit of insurance might be sensible, since the worst can happen as we have seen.
Recession
A recession is a period of decline in a national economy over a period of time, usually two quarters of a financial year. When a recession continues for a longer period of time and is of a more severe nature, it is termed as an economic depression. However, the defining line between recession and depression is not always clearly marked.
Contagion
Contagion is the cross-border spread of financial shocks. Such international spillover means that economic or financial troubles that originate in one nation can affect others.
Repo Rate
Repo rate Repo rate, is short for repurchase rate, and is also known as the official bank rate.
Liquidity Trap
A liquidity trap occurs when the demand for money is so huge people don't want to hold anything but money.
The Fed
The Federal Reserve System is the central bank of the US.
Bailout
A bailout is a rescue from financial trouble. Bailouts are normally enacted by governments to provide financial aid to ailing firms, regional, city or local governments. US and European governments have enacted large bailouts as a response to the credit crunch.
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