Term of the day-"Arbitrage"

Definition:-

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a
trade that profits by exploiting price differences of identical or similar financial instruments, on different
markets or in different forms. Arbitrage exists as a result of market inefficiencies.

A Simple Example:-

For example, if Company XYZ's stock trades at $5.00 per share on the New York Stock Exchange
(NYSE) and the equivalent of $5.05 on the London Stock Exchange (LSE), an arbitrageur would
purchase the stock for $5 on the NYSE and sell it on the LSE for $5.05 -- pocketing the difference of
$0.05 per share.

Theoretically, the prices on both exchanges should be the same at all times, but arbitrage opportunities
arise when they're not. In theory, arbitrage is a riskless activity because traders are simply buying and
selling the same amount of the same asset at the same time. For this reason, arbitrage is often referred
to as "riskless profit."

Term of the day - "Quantitative Easing"

An unconventional monetary policy in which a central bank purchases government securities or other
securities from the market in order to lower interest rates and increase the money supply. Quantitative
easing increases the money supply by flooding financial institutions with capital in an effort to promote
increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or
approaching zero, and does not involve the printing of new banknotes.

Explanation of the term-

Typically, central banks target the supply of money by buying or selling government bonds. When the
bank seeks to promote economic growth, it buys government bonds, which lowers short-term interest
rates and increases the money supply. This strategy loses effectiveness when interest rates approach
zero, forcing banks to try other strategies in order to stimulate the economy. QE targets commercial bank
and private sector assets instead, and attempts to spur economic growth by encouraging banks to lend
money. However, if the money supply increases too quickly, quantitative easing can lead to higher rates
of inflation. This is due to the fact that there is still a fixed amount of goods for sale when more money is
now available in the economy. Additionally, banks may decide to keep funds generated by quantitative
easing in reserve rather than lending those funds to individuals and businesses.

Term of the day - "Tapering"

A gradual winding down of central bank activities used to improve the conditions for economic growth.
Tapering activities is primarily aimed at interest rates and investor expectations of what those rates will be
in the future. These can include conventional central bank activities, such as adjusting the discount rate
or reserve requirements, or more unconventional ones, such as quantitative easing (QE).

Explanation of the term -

Central banks can employ a variety of policies to improve growth, and they must balance short-term
improvements in the economy with longer-term market expectations. If the central bank tapers its
activities too quickly, it may send the economy into a recession. If it does not taper its activities, it may
lead to high inflation.
Tapering is best known in the context of the Federal Reserve's quantitative easing program. In reaction to
the 2007 financial crisis, the Federal Reserve began to purchase assets with long maturities to lower
long-term interest rates. This activity was undertaken to entice financial institutions to lend money, and it
began when the Federal Reserve purchased mortgage-backed securities. In 2013, Ben Bernanke
commented that the Federal Reserve would lower the amount of assets purchased by the Fed each
month if economic conditions, such as inflation and unemployment, were favorable.
Being open with investors regarding future bank activities helps set market expectations. This is why
central banks typically employ a gradual taper rather than an abrupt halt to loosen monetary policies.
Central banks reduce market uncertainty by outlining their approach to tapering, and under what
conditions that tapering will either continue or discontinue.

Term of the Day - "Forward Contract"

A forward contract is a private agreement between two counter parties - a buyer and a seller, giving the
buyer an obligation to purchase an asset (and the seller an obligation to sell the asset) at a set price at a
future point in time. The delivery of the asset occurs at a later time but the price is determined at the time
of purchase.

The assets often traded includes anything from:
Foreign currencies, Financial instruments, Grains, Precious metals to Electricity, Oil, Natural gas, Orange
juice, etc. The underlying asset could even be interest rates.

A pictorial representation:



Some essential features of the contract"
- Highly customized
- All parties exposed to counter party default risk
- Transactions take place in large, private and largely unregulated markets

Term of the day "Stock Exchange"

Organised and regulated financial markets where securities (bonds, notes and shares) are bought and
sold at prices governed by the forces of demand and supply.
They serve as:
1. Primary markets - This is where new issues are first sold through initial public offerings. Institutional
investors typically purchase most of these shares from investment banks.
2. Secondary markets - All subsequent trading goes on in the secondary market where participants
include both institutional and individual investors.

The core function of a stock exchange is to ensure fair and orderly trading, as well as efficient
dissemination of price information for any securities trading on that exchange.
The stock market lets investors participate in the financial achievements of the companies whose shares
they hold. When companies are profitable, stock market investors make money through the dividends the
companies pay out and by selling appreciated stocks at a profit called a capital gain. The downside is that
investors can lose money if the companies whose stocks they hold lose money, the stocks' prices goes
down and the investor sells the stocks at a loss.

Exchanges are located all around the globe, with some of the more famous ones being the New York
Stock Exchange, Nasdaq, London Stock exchange and the Tokyo Stock Exchange. London Stock
Exchange is the oldest in the world, while Bombay Stock Exchangeis the oldest in India.