Definition The Exchange Rate Mechanism (ERM) is essentially a framework that a country uses to manage its currency’s value against other currencies. It can be thought of as a safety net, helping to avoid extreme fluctuations in exchange rates that could disrupt international trade and investments. Components of ERM Fixed Exchange Rates: In some ERM systems, currencies are pegged to a major currency, like the US dollar or the euro, to maintain stability.
Definition Fixed income refers to a type of investment security that pays investors fixed interest or dividend payments until its maturity date. Upon maturity, investors are repaid the principal amount invested. Fixed income securities are typically used by investors seeking regular income and lower risk compared to stocks. These instruments include government and corporate bonds, treasury bills, municipal bonds and preferred stocks. Characteristics Capital Preservation: Fixed income investments are often used by conservative investors to protect their capital, as they generally involve lower risk compared to equities.
Definition Foreign Exchange, commonly known as Forex, is the marketplace for trading the world’s currencies. It’s one of the largest financial markets globally, with a daily trading volume exceeding $6 trillion. This decentralized market allows traders to buy, sell, exchange and speculate on currencies, which can be influenced by various factors like economic indicators, geopolitical events and market sentiment. Components of Forex Currency Pairs: In Forex, currencies are traded in pairs.
Definition A Fund of Funds (FoF) is an investment vehicle that pools capital from multiple investors to invest primarily in other investment funds, rather than directly in stocks, bonds or other securities. This structure allows investors to achieve greater diversification and access to a variety of investment strategies, often managed by seasoned professionals. Components of Fund of Funds Underlying Funds: The core components of a Fund of Funds are the various underlying funds it invests in, which can include hedge funds, mutual funds, private equity funds or venture capital funds.
Definition The Global Financial Crisis (GFC), which occurred between 2007 and 2008, is often regarded as one of the most severe financial crises in modern history. It began in the United States but quickly spread to economies worldwide, leading to significant financial disruptions and a global recession. The crisis was fueled by a combination of factors, including risky mortgage lending practices, excessive risk-taking by financial institutions and regulatory failures.
Definition A hedge fund is a pooled investment fund that employs diverse strategies to earn active returns for its investors. Hedge funds are known for their flexibility in investment vehicles, often engaging in leverage, shorts, options, futures and other derivative strategies to manage risk and capitalize on both rising and falling markets. They cater to accredited investors and operate with less regulatory oversight than mutual funds and other traditional investment vehicles.
Hedge fund managers are the skilled professionals who navigate the complex world of investments in pursuit of high returns for their clients. These managers oversee investment funds that employ a variety of strategies, including leveraging, short selling and derivatives trading. Their ultimate goal is to generate alpha or excess returns above a benchmark, by making informed and strategic investment choices. Unlike traditional fund managers, hedge fund managers have more flexibility in their investment approaches, allowing them to capitalize on market inefficiencies and economic trends.
Definition Hedging is a risk management strategy used by investors and companies to protect themselves against potential losses. This is typically achieved through various financial instruments, such as derivatives, which allow market participants to offset their exposure to potential adverse price movements. Essentially, hedging serves to reduce the volatility of returns on an investment portfolio. Key Components of Hedging Financial Instruments: Common tools include options, futures contracts, swaps and forwards, which create a buffer against price changes.
Definition High Yield Bond Spread refers to the difference in yield between high yield bonds (often referred to as junk bonds) and a benchmark yield, typically government securities like U.S. Treasury bonds. This spread is a crucial indicator of the risk-return trade-off in the bond market. When investors demand a higher yield for these bonds, it signals potential credit risk associated with the issuer. Components of High Yield Bond Spread Yield: This is the income generated from the bond, expressed as a percentage of its price.
Definition Impact Investing refers to investments made into companies organizations and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. It goes beyond merely avoiding harm by actively contributing to social or environmental good. Importance of Impact Investing Impact investing challenges the traditional views that social issues should be addressed only by philanthropic donations and that market investments should focus solely on achieving financial returns.