With the increase in trading by institutional investors, trading arrangements more suitable to these investors were developed. Institutional needs included trading in large size and trading groups of stocks, both at a low commission and with low market impact. This has resulted in the evolution of special arrangements for the execution of certain types of [...]
Margin Transactions
Investors can borrow cash to buy securities and use the securities them- selves as collateral. A transaction in which an investor borrows to buy shares using the shares themselves as collateral is called buying on mar- gin. By borrowing funds, an investor creates financial leverage. The funds borrowed to buy the additional stock will be [...]
Speculative Flow Reverses — The Local Currency Collapses
Theory The tension between speculative inflows and fundamental outflows continues to increase, causing violent price swings, until such point as those inflows are not sufficient to offset the rising tide of outflows. Like an inventory overhang that seems to appear out of nowhere in the wake of over-investment, the result is a supply–demand imbalance in [...]
USE OF INTEREST RATE DERIVATIVES
There is now a wide range of interest rate derivatives available in most developed markets. These derivatives provide bank treasuries with tools to change their exposure to shifts in interest rates without having to act to change the composition of the banks’ balance sheet directly. The latter is difficult to achieve quickly and efficiently in [...]
Fundamental Deterioration — The Local Currency Becomes Volatile [practice]
From March to mid-June 2001, the Polish zloty continued to appreciate, albeit in an increasingly chaotic and volatile manner. Frequent sell offs would be followed by sharp rallies. Asset managers were more and more aware of the degree of slowdown in the national economy. While this should conversely be good news for fixed income investors [...]