Bail Out

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Typically, when a business collapses, the government or other businesses and financial institutions offer money to help them recover. Especially if the business has a lot of people and their interests involved, the government provides some kind of a financial aid, either to be reimbursed or not reimbursed. Such action is called “bail out”. One of the most well-known examples of bail out would be the one during the US financial crisis in 2008. When the banks and several companies collapsed and went bankrupt, the government provided nearly USD700 billion to help them recover. On top of saving these institutions, there were far too many people affected by the crisis that governmental aid was necessary. 

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Bail out is not only restricted to businesses and corporations. It can also be used when a country is in a severe financial crisis. When a country faces a severe debt crisis and is not able to pay back, it may get some help from other nations or international financial organizations like the International Monetary Fund (IMF). When bail out begins, money is either lent or given for the country or company to use to get out of the crisis. After sometime, when it recovers to a certain degree in which its financial providers feel that it could become more independent, especially in terms of employment and the overall management, it is then left to operate on its own.  

The Greek debt crisis has been an ongoing issue for some time. As a member of the Euro Zone, European Union members came together to offer bail out. As Greece faced financial crisis, the whole EU was affected in terms of currency rate. Its currency value depreciated, although the crisis was not the only contribution to such happening.  

As there is a vast network of intertwined interests, bail out not only rescues a business or a country alone, but also may reduce the impact received by other institutions or countries. Although not always successful, it can make a business or a country profitable again. From the crisis to its recovery, the bailed out member may contribute to the economy even more actively.

Quantitative Easing

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Money circulates around the world, in different currencies and different amounts. Every currency has its own degree of competitiveness, which is measured by the exchange rate. If your country’s currency depreciates, then its value goes down, which makes it cheaper for other currencies to exchange into your currency. On the other hand, if the currency appreciates, then other countries can buy less of it with every unit of their currency.  

The currency rate is determined by the market. As trade and direct currency exchange take place, currency rate either depreciates or appreciates in relation to other countries’ currencies. However, at times, it could also be controlled by the government. According to the principles of economics, in order to encourage spending, there has to be more money circulating in the market. Also, banks have to offer low interest rates in order to encourage loaning and further spending. Therefore, when money does not circulate enough in one’s country, the government sometimes implements fiscal policies to increase the circulation. This process is called “quantitative easing”.

 In addition to more circulation of money domestically, as trade plays a large role in lots of countries these days, currency depreciation is done through quantitative easing. What this means is that, as lowering the currency value of a country makes it more attractive for the other countries to trade with that country, the government lowers the currency value to encourage more trade. Through this, the country can benefit financially from selling more of its products abroad.

Quantitative easing is done through purchasing securities. The banks purchase securities from the government and the market in order to increase the money supply. At the government-level, it may sell its bonds to other countries’ governments. Consequently, as the money circulation increases, the interest rates go down and the currency value further goes down. Moreover, as the overall liquidity of the country increases, people can borrow money with lower interest rate.

In addition to all the lucrative sides of quantitative easing, there is also the negative side. Looking at it from the domestic perspective, as there is more money in the market, quantitative easing may, and usually does, lead to higher inflation. The overall economy increases, but the price of goods and services in the country increase as well.

This is a strategy used by some countries throughout the world, the biggest examples being China and USA. It has also been reported recently that Japan is going through the same process. Countries strategically implement such policy while making sure that not every country is doing it at the same time. It is very difficult to strictly say whether quantitative easing beneficial or harmful, it does bring both benefits and side effects.

“Useful-to-know Financial Terms #7: Long/short Funds”

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“Long/short funds are the mutual fund industry’s attempt to bring some of the advantages of a hedge fund to the common investor. Most long/short funds feature higher liquidity than hedge funds, no lock-in period and lower fees. However, they still have higher fees and less liquidity than most mutual funds. Long/short funds aren’t allowed to use as many derivative and short positions nor as much leverage as hedge funds, but they do provide some diversification to the average investor in down markets. Unlike most mutual funds, long/short funds use leverage, derivatives and short positions in an attempt to maximize total returns, regardless of market conditions.” – Investopedia

Long/short funds are gaining popularity in Korea nowadays as investors worry about the potential bearishness of the stock markets due to slowing economic growth and rapidly aging population. Long/short funds can invest up to 20% of their net assets but investors with large short positions are required to report to the financial authorities.

Read FT’s related article -> http://goo.gl/hn9HX7

“Useful-to-know Financial Terms #6: Proprietary Trading”

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“Proprietary trading (also “prop trading” or PPT) occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with the firm’s own money as opposed to its customers’ money, so as to make a profit for itself. They may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage or global macro trading, much like a hedge fund. Many reporters and analysts believe that large banks purposely leave ambiguous the amount of non-proprietary trading they do versus the amount of proprietary trading they do, because it is felt that proprietary trading is riskier and results in more volatile profits.” – Wikepedia

As the Volcker Rule has been approved by the US regulators, banks and financial institutions will be banned from all actions of making risky bets including proprietary trading. Such action is expected to ensure safer financial system and reduce market volatility.

“Useful-to-know Financial Terms #5: Covered Short-selling and Naked Short-selling”

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“Covered Short-selling”: covered short-selling occurs when an investor borrows stocks of a company and sell them at a lower price and return them to the lender within 3 days before the settlement date.

“Naked Short-selling”: naked short-selling occurs when an investor shorts a stock without having or borrowing any stocks. Naked short-selling is banned in Korea because of the risk it poses to the market transparency.

* Both covered and naked short-selling take place when an investor speculates stock price to fall and intends to pocket the difference in the current stock price and the price on the actual settlement date.

“Useful-to-know Financial Terms #4: ‘London Whale’ Case”

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In April and May 2012, large trading losses occurred at JPMorgan’s Chief Investment Office, based on transactions booked through its London branch. The unit was run by Chief Investment Officer Ina Drew, who has since stepped down. A series of derivative translations involving credit default swaps (CDS) were entered, reportedly as part of the bank’s “hedging” strategy. Trader Bruno Iksil, nicknamed the London Whale, accumulated outsized CDS positions in the market. An estimated trading loss of $2 billion was announced, with the actual loss expected to be substantially larger. These events gave rise to a number of investigations to examine the firm’s risk management systems and internal controls.
(Source: Wikipedia)

JPMorgan beared more than $2 billion investment loss due to judgement errors based on inaccurate market prospect. Bruno Iksil, a trader in JPMorgan London office who was nicknamed “London Whale” after his excellent investment performances, was found out to be the person in charge of the transaction.
Due to such instant judgement mistake, JPMorgan is to pay approximately $100 million worth of penalty to the Commodity Futures Trading Commission.

“Useful-to-know Financial Terms #3: KONEX”

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“Korea New Exchange (KONEX) is a new stock exchange market exclusively for SMEs. SMEs and venture companies with huge growth potential but fall short of the requirements to be listed on the KOSPI or KOSDAQ will be listed and traded on the KONEX. KONEX is expected to provide efficient financing to SMEs and venture companies, expand investment opportunities in promising firms, and lay an important foundation for realizing Creative Economy and further develop the capital market.”

Related news articles
http://www.globalpost.com/dispatch/news/yonhap-news-agency/130630/krx-launches-new-venture-driven-konex-market-0

http://www.koreaherald.com/view.php?ud=20130630000301