Category: Concepts
-
What is Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is one of the most commonly used economic indicators to measure the size and health of a country’s economy. GDP measures the total value of all goods and services produced within a country’s borders in a given period, typically a year. It provides an indication of the level of economic activity…
-
The Future of Finance: Exploring the Power of Artificial Intelligence
Artificial Intelligence (AI) is a branch of computer science that focuses on creating machines and software that can perform tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and natural language processing. AI algorithms are designed to learn from experience and adapt to new situations, enabling machines to perform tasks that…
-
What is Stagflation?
Stagflation is a combination of the words “stagnant” and “inflation.” Stagflation is defined as an economic scenario with high inflation rates, low economic growth, and often characterized by high unemployment rates. Stagflation can pose a quandary for governments because most actions aimed at lowering inflation like raising of interest rates may cause hardship to existing…
-
What is an Interest Rate Swap?
An interest rate swap is a derivative contract between two parties to swap or exchange cashflows representing two separate streams of interest payments, denominated in a single currency and calculated on a ‘notional’ principal amount. Interest rate swaps can help institutions manage the risks associated with volatility in interest rates. They also provide fixed income…
-
What are Interest Rate Options?
Interest rate options are financial derivative contracts that enable investors to speculate or hedge against directional changes in interest rates. Interest rate options can be exercised at the strike price of the contract which is a pre-determined rate of Interest. Interest rate options are cash settled. As with equity options, an interest rate option involves a…
-
What is a Forward Rate Agreement (FRA)
A Forward Rate Agreement (FRA) is a financial contract between two parties to exchange interest payments on a `notional principal’ amount on a pre-determined settlement date, for the duration of the contract. In conventional forward rate agreements, two parties swap a fixed interest rate for a variable one. The borrower is the party responsible for…
-
What is a Mortgage-Backed Security (MBS)?
A mortgage-backed security (MBS) is an financial instrument that is similar to a bond and is composed of a collection of mortgage loans that have been acquired from the banks that issued them and sold as a ‘bundle’ to individual investors. The investors of MBS earn periodic interest payments on these instruments payable by the…
-
What is a Credit Default Swap (CDS)?
A credit default swap (CDS) is a type of credit derivative instrument that protects a buyer from default and other risks associated with debt instruments held by him. Until the credit maturity date, the buyer of a CDS has to pay to the seller a premium on a regular basis. In exchange, the seller guarantees…
-
What are Currency Futures Contracts?
A currency futures contract, commonly referred to as an FX futures, is an agreement to exchange one currency for another at a specified future date for an agreed price (exchange rate) that is set at the time of entering into the contract. Although currency futures contracts and currency forwards have many similarities, futures contracts are…
-
Why are Interest Rates Rising and what it means in the Indian Context?
We know that when there is abundance of something, its price falls. The reverse happens in case of scarcity, when the price tends to increase. This is simple #Economics101. Now, think of money like any other commodity. If you need some money now and your savings fall short, you can always borrow cash from a…
-
What is Quantitative Easing? How does QE work?
Quantitative easing (QE) is the term used to define large-scale purchases of government securities by central banks from the open market in an effort to boost the economic cycle and lower the yields on bonds and other debt instruments. The central banks funds this large-scale purchase of government securities by bringing more money into existence.…
-
What is a Financial Bubble
A financial bubble can be described as a phenomenon wherein an asset or an asset class trades at a value that far exceeds its intrinsic value. We know that unless the market for an asset is regulated, it is the market forces of demand and supply which determines the price at which the asset is…