Economic  and Financial Glossary

  • 1997 Asian Currency Crisis - In 1997, currency speculators panic in Asia, leading to the collapse of the
    economies. This explains why Asian countries keep high foreign reserves as a hedge against further
    runs.
  • Asset Allocation - All the baskets that your eggs are in, and how many of your eggs are in each basket.
  • Asset-backed Commercial Paper - Corporate debt that matures within a year and is backed by assets
    such as mortgages, auto loans and other commercial loans.
  • Asset Bubble - When the prices of assets are over-inflated due to excess demand.
  • Asset Price Inflation -  Rising prices in assets, such as housing and stock prices, that aren't included in
    the Fed's inflation measurement tools. Dangerous because bubbles have occurred, and the Fed
    continued to lower rates and feed inflation in these sectors.
  • Basis Points - The percentage that the Fed raises bank rates. For example, an increase of 25 basis
    points is the same as an increase of .25 to the Fed Funds rate.
  • Bolivarism - A movement led by Venezuelan President Hugo Chavez which advocates unity among South
    American countries in an attempt to gain local power to resist U.S. hegemony. It is named after Simon
    Bolivar, who liberated South America from the Spanish.
  • CAFTA-DR (Central American Free Trade Agreement - Dominican Republic) - CAFTA is a free trade
    agreement between the U.S. and Honduras, El Salvador, Nicaragua, Guatemala, Costa Rica and the
    Dominican Republic.
  • Call Option - The right to buy stock at an agreed upon price by a certain date. The investor hopes the
    price of the stock goes up by the date, so they can buy them at the agreed upon price, and sell them at
    the (higher) market price.
  • Carbon Emissions Trading - When a carbon producing company buys or sells an allotment of allowable
    emissions. Companies may either reduce their emissions and sell the surplus or buy them in the
    marketplace.
  • Central Bank - Influences economic growth and inflation by adjusting liquidity through short term interest
    rates or the amount of money banks must keep on reserve.
  • Chiang Mai Initiative - An agreement among the ASEAN+3 countries to support each other's current
    account reserves in the event of speculative capital outflows. This is to avoid another market crash
    similar to that which happened in 1997.
  • Commodities - Hard assets, such as gas, oil, gold,silver, platinum and copper. Most commodities trading
    is done through futures contracts so that the trader doesn’t have to actually take possession of the
    commodity.
  • Comparative Advantage - What makes a country inherently more competitive. For example, India has
    highly trained, young, yet relatively cheap labor force which allows it to provide high end services at a low
    cost.
  • Competitive Advantage - The inherent qualities of a company that allows it to provide a particular benefit
    better than its competitors.
  • Covenant-lite Loans - Bank loans with few covenants, or restrictions, that banks normally place upon the
    borrowers, such as debt ceilings or repayment schedules.
  • Covered Option - A short call or put option position that is covered by the sale or purchase of the
    underlying futures contract or other underlying instrument. For example, in the case of options on futures
    contracts, a covered call is a short call position combined with a long futures position. A covered put is a
    short put position combined with a short futures position.
  • Current Account Deficit - The total trade deficit plus how much money we owe other countries and
    investors to pay for the trade deficit.
  • Derivatives -   Complicated financial instruments, like options and futures contracts, that derive their
    value by reference to an underlying asset or index.
  • Developed Markets - Usually referring to the U.S., Europe, Japan and Russia. These are more mature
    economies that will grow more slowly, and so have less growth opportunity for investors, but are also less
    risky.
  • Diversification - Basically, not having all your eggs in one basket. Lo wering your financial risk by having
    your assets in things that aren’t affected by the same trends.
  • Doha Round of Trade Talks - Started in 2001, the Doha round of trade talks was designed to reduce
    trade restrictions to help developing nations. Instead, it has stalled due to developed countries’
    unwillingness to remove farm subsidies. Developing countries are afraid that, if they open their markets
    to these low-priced goods, their farmers will be put out of business.
  • Dumping - Selling goods below cost to gain market share in a foreign country. Usually supported by the
    government with subsidies and low cost loans.
  • Economies of Scale - The ability of larger companies to produce things more cheaply per unit because
    they produce so many.
  • Emerging Markets - Usually referring to countries that have more raw materials to develop, and are
    growing faster than the developed markets. They usually include Brazil, India, South Korea, South Africa,
    Mexico, Taiwan, Indonesia, Egypt, Turkey, and Hong Kong.
  • EUA (European Allowance) - An allotment of carbon that the EU allows a company to produce.
    Companies that produce less can sell the EUA on the market to companies that produce more than their
    allotment.
  • Farm Bill - The U.S. farm bill is a comprehensive piece of legislation that revises 60+ laws that govern
    farm support, food assistance, agricultural trade and rural development. The farm bill is enacted every 5
    years and implements U.S. agricultural policy.
  • Fast-track Trade Promotion Authority - Gave President Bush the authority to negotiate trade
    agreements, giving Congress only the ability to approve or disapprove, and not attach amendments.
    Expired
  • FDI (Foreign Direct Investment) - The investment foreign countries have made in a country’s economy.
  • Foreign Reserves - A country's reserve of foreign currencies and gold.
  • Free Trade Agreement - An agreement between countries to eliminate tariffs and other trade
    impediments.
  • Futures Contract - An agreement to purchase or sell a commodity for delivery in the future at an agreed
    upon price that may be satisfied by delivery (hardly ever used) or offset (a compensating option).
  • Globalization - A highly controversial trend towards freedom of trade between countries all around the
    world. Underdeveloped countries worry that they cannot compete fairly.
  • Hang Seng Index - Hong Kong’s blue chip stock index.
  • Hedge - Reduce financial risk through protective purchases in investments that will offset the risk.
  • Hedge Fund - A privately owned investment fund, whose managers usually get a percent of any gains.
    To achieve above market returns, they use sophisticated high risk derivatives. The primary investors are
    wealthy individuals and institutions.
  • Hegemony - The leadership or predominance of one country over others, usually used to describe the
    United States' relationship to other countries in the world.
  • Inflation Targeting - When central banks set monetary policy to keep inflation within a designated range.
  • Intifada - Arab term meaning uprising, applied to Palestinian rebellions against Israeli occupation.
  • Inverted Yield Curve - When the Fed Funds rate pays higher interest than the 30-year Treasury Bond.
  • IPO (Initial Public Offering) - The first time a company sells stock on the stock market, known as going
    public.
  • Islamist - Muslim fundamentalism that advocates a return to Islamic values in government and Sharia law.
  • Kospi Index - South Korea’s major stock index.
  • Kyoto Protocol - Adopted as part of the UN International Convention on Climate Change in 1997 in Kyoto,
    Japan. Participating countries agree that, between 2008-2012, they will emit 5% less greenhouse gases
    (CO2, CH4, N2O, HFCs, PFCs, and SF6) than they did in 1990.
  • LBO (Leveraged Buyout) - Using a loan to buy another company. Usually the loan is secured by the
    assets of the target company.
  • Leverage - Controlling a large amount of stocks with a small amount of the investor’s money, through
    either derivatives or loaned money.
  • Liquidity - Amount of money, or capital, that is circulating in the economy and available for investment.
  • Marshall Plan - The U.S. spent $82 billion in economic and military aid between 1948-1961 to postwar
    Europe to prevent starvation and the spread of Communism. It was named for Secretary of State George
    C. Marshall, who received a Nobel Peace Prize for it.
  • mcf - A measure of gas usage equivalent to one thousand cubic feet of natural gas.
  • Mercosur - A trade alliance formed in 1991 between Brazil, Argentina, Paraguay, and Uruguay. Chile and
    Bolivia are associate members. Venezuela wants to join.
  • Mortgage-backed Securities - A package of mortgages that are resold to investors. This removes
    constraints on banks to make sure the loans are to qualified borrowers.
  • NAFTA (North American Free Trade Agreement) Signed in 1992, and ratified in 1994, by the United
    States, Canada, and Mexico. It called for the gradual elimination of tariffs and certain other trade barriers
    between the three nations.
  • Nationalize - When a government takes over ownership of a business, usually a utility or oil company.
    The former private owner may be allowed to retain partial ownership.
  • NATO (North Atlantic Treaty Organization) - An alliance of 26 countries roughly bordering the north
    Atlantic Ocean - Canada, U.S., most EU members, and Turkey. NATO was established after World War II
    as part of the United Nations. Originally designed to defend only member nations, it expanded its role to
    include the war on terrorism after 9/11, which was considered an attack on the U.S.
  • Nikkei 225 - Japan’s stock index.
  • Nuclear Non-Proliferation Treaty - Signed in 1968, and made permanent in 1995 by almost all countries,
    except India, Israel, Pakistan and North Korea, who are suspected of having or developing nuclear
    weapons in defiance of the treaty. Under the treaty, nations that have nuclear weapons agree (1) not to
    help countries that do not already have such weapons acquire them; (2) to help non nuclear-armed
    countries benefit from the peaceful uses of nuclear energy; and (3) to seek nuclear disarmament. Also,
    countries without nuclear weapons agree (1) not to acquire nuclear weapons and (2) to allow the
    International Atomic Energy Agency (IAEA) to inspect nuclear facilities and materials in each country.
  • Option - A derivative that gives the owner the right to buy or sell stock at an agreed upon price within a
    certain period of time.
  • PNTR (Permanent Normal Trade Relationship) - Denotes non-discriminatory trading relationship. In other
    words, all countries with PNTR have the same, lower tariffs than countries without. Only a few countries
    do not have this status, and are thus at a trading disadvantage.
  • Private Equity Firms - Companies that raise money through private investors, including governments and
    pension funds, to buy ownership (equity) in corporations.
  • Privatization - When a government sells all or part of a state-owned company, usually a utility, to a private
    company.
  • Purchasing Power Parity - How well someone is able to live in a country. For example, if people in China
    make half of what people in the U.S. make, but Coca-Cola only costs half as much, then they have
    equivalent purchasing power parity.
  • Put Option - The right to sell stock at an agreed upon price at any time up to an agreed upon date. The
    investor hopes the stock price goes down by the date, so they can buy it at the lower market rate, and
    sell it at the (higher) agreed upon price.
  • Roadmap for Peace - The Quartet's suggestion for MIddle East peace: Israel and Palestine establish two
    separate countries with internationally recognized boundaries, Israel withdraw from occupied territories,
    and Palestine must recognize Israel’s right to exist.
  • SENSEX - India’s major stock index, the Bombay Stock Exchange Sensitive Index, is comprised of 30
    stocks.
  • Shanghai Composite Index - Mainland China’s major stock index.
  • Sharia - Muslim religious law.
  • Short sale - The promise to sell a stock that the seller does not now own at an agreed upon price. The
    investor hopes the stock price declines, so they can buy it at the lower price and sell it at the (higher)
    agreed upon price.
  • Sovereign Wealth Funds - An investment pool of foreign reserves which a country's government invests
    in assets.
  • Tariffs - Taxes levied against imports from another country.
  • Third World - Economically developing countries in Asia, Africa and South America.
  • TIPS (Treasury Inflated Protected Securities) U.S. Treasury Bonds that have the prinicipal re-adjusted in
    response to the Consumer Price Index. As inflation increases, the value of the bond increases.
  • Trade Deficit - When one country imports more goods than it exports. It usually has to borrow from other
    countries to pay for the imports.
  • Trade Promotion Authority - Gave President Bush the authority to negotiate trade agreements, giving
    Congress only the ability to approve or disapprove, and not attach amendments. Expired June 30, 2007.
  • VAT (Value Added Tax) - Most European countries have this tax, which allows them to tax the value-
    added that other countries have added to an import.
  • Volatility - How much and how quickly the price of an asset changes. High volatility means the asset is
    risky, low volatility means it is safe relative to the market.
  • Yen Carry Trade - When currency speculators borrow in one country’s currency that have a low interest
    rate to reinvest in currencies and assets in countries that have a higher rate of return. Many experts
    believe that some of the global liquidity is due to the carry trade in yen, which has close to a zero interest
    rate cost.
  • Washington Consensus - A 1980's IMF doctrine that said that deregulation, privatization, and open trade
    with primarily the U.S. would help Latin America increase economic growth. Many of those countries now
    feel they were exploited, which helps explain why they are attracted to China as a trading partner.
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