Term of the day

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DEFINITION of 'National Currency'
The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is usually the predominant currency used for most financial transactions in that country.

INVESTOPEDIA EXPLAINS 'National Currency'
A handful of national currencies such as the U.S. dollar and the euro have achieved global status as reserve currencies and are extensively used in international trade transactions. The euro has supplanted the national currencies of a number of nations that comprise the European Union. The national currencies of some countries such as the United Arab Emirates are pegged or fixed to the U.S. dollar.

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DEFINITION of 'Multicurrency Note Facility'
A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. This type of credit facility allows the borrower to choose which currency to use in each rollover period when the loan is refinanced, but allows the lender to choose the currency the loan is to be repaid in.

INVESTOPEDIA EXPLAINS 'Multicurrency Note Facility'
Multicurrency note facilities are the riskiest lending avenue for borrowers. This is because the borrower assumes the foreign-currency risk in the transaction, since the lender decides which currency to receive repayment in, typically at a predetermined exchange rate. The loans from these facilities usually reprice about every six months.

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DEFINITION of 'Inbound Cash Flow'
Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow can include sales revenue generated through business operations, refunds received from suppliers, financing transactions and amounts won through legal proceedings.

INVESTOPEDIA EXPLAINS 'Inbound Cash Flow'
Any positive cash additions to an entity's bank account. When a salesperson is paid from their employer for their time spent working, this an inbound cash flow for the employee. Conversely, this payment to the employee represents an outbound cash flow for the employer. When the salesperson successfully completes a sale to a customers, this represents and inbound cash flow for the company.

As well, consider a company going through a round of debt financing. When a company issues bonds, they are borrowing money, which will need to be repaid in the future (with interest). However, at the time the bond is sold, the company receives the cash, which makes it an inbound cash flow for the company. When the bond is later repaid, this is an outbound cash flow for the company.

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DEFINITION of 'Radner Equilibrium'
A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then even in the face of uncertainty about the economic environment, an optimal allocation of resources based on competitive equilibrium can be achieved. Radner Equilibrium was introduced by American economist Roy Radner in 1968, and explores the condition of competitive equilibrium under uncertainty.

INVESTOPEDIA EXPLAINS 'Radner Equilibrium'
The theory also states that in such a world there would be no role for money and liquidity. And the introduction of information (such as the introduction of spot markets and futures markets) about the behavior of other decision makers introduces externalities among the sets of actions available to them. This generates a demand for liquidity, which also arises from computational limitations. The theory notes that uncertainty about the environment greatly complicates a decision problem, thereby indirectly contributing to the demand for liquidity.

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DEFINITION of 'ZEW Economic Sentiment'
A monthly economic survey. The ZEW Economic Sentiment is an almalgamation of the sentiments of approximately 350 economists and analysts regarding the economic future of Germany for the next six months. The survey shows the balance between those analysts who are optimistic about Germany's economic future and those who are not.


INVESTOPEDIA EXPLAINS 'ZEW Economic Sentiment'
The ZEW Economic Sentiment covers the economic futures of several other countries as well. This survey includes analyst opinions for Europe, the UK, Japan and the U.S. An index value greater than zero indicates optimism while a value below zero indicates pessimism.

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DEFINITION of 'Developed Economy'
While there is no one, set definition of a developed economy it typically refers to a country with a relatively high level of economic growth and security. Some of the most common criteria for evaluating a country's degree of development are per capita income or gross domestic product (GDP), level of industrialization, general standard of living and the amount of widespread infrastructure. Increasingly other non-economic factors are included in evaluating an economy or country's degree of development, such as the Human Development Index (HDI) which reflects relative degrees of education, literacy and health.

INVESTOPEDIA EXPLAINS 'Developed Economy'
The most well-known current examples of developed countries include the United States, Canada and most of western Europe, including England and France.


Terms such as "emerging countries," "third world countries" and "developing countries," are commonly used to refer to countries that do not enjoy the same level of economic security, industrialization and growth as developed countries. The United Nations Conference on Trade and Development (UNCTAD) points out that the least developed of the developing countries are "deemed highly disadvantaged in their development process – many of them for geographical reasons – and (face) more than other countries the risk of failing to come out of poverty."

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Currency Carry Trade
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DEFINITION OF 'CURRENCY CARRY TRADE'
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

INVESTOPEDIA EXPLAINS 'CURRENCY CARRY TRADE'
Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.

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DEFINITION of 'Guarantee Fees'
Fees charged by mortgage-backed securities (MBS) providers, such as Freddie Mac and Fannie Mae, to lenders for bundling, servicing, selling and reporting MBS to investors. The main component of the guarantee fee is charged to protect against credit-related losses in the mortgage portfolio (think of it like MBS insurance), but small sub-fees are also deducted to cover internal expenses for such services as:

-Managing and administering the securitized mortgage pools
-Selling the MBS to investors
-Reporting to investors and the SEC
-Maintaining the MBS on the open market, and selling, general and administrative expense

INVESTOPEDIA EXPLAINS 'Guarantee Fees'
Commonly known in the industry as "g-fees", this small deduction (the average is 15-25 basis points in relation to the stated coupon rate) allows the corporations selling the MBS to make a profit, while benefiting both mortgage lenders and borrowers by making groups of mortgages more marketable and liquid. This helps bring investor capital into the business, allowing all participants to lower their risk exposure and enabling them to offer mortgages to borrowers of lower credit quality.

The coupon rate on an MBS (also known as the pass-through rate) is the average rate on the underlying mortgages minus the guarantee fees.

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DEFINITION of 'Corporate Ladder'
A conceptualized view of a company's employment hierarchy in which career advancement is considered to follow higher rungs on a ladder, with entry-level positions on the bottom rungs and executive level positions at the top. "Climbing the corporate ladder" is a phrase used to describe one's advancement within a company through promotions.


INVESTOPEDIA EXPLAINS 'Corporate Ladder'
The higher an employee's position on the corporate ladder, the more difficult advancement becomes. An organization typically has many more lower, or entry-level, positions than it does management or executive positions.

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DEFINITION of 'Vintage'
A slang term used by mortgage-backed securities (MBS) traders and investors to refer to an MBS that is seasoned over some time period. MBSs typically have maturities around 30 years, and a particular issue's 'vintage' will expose the holder to less prepayment and default risk, although this decreased risk also limits price appreciation.

INVESTOPEDIA EXPLAINS 'Vintage'
The underlying loans of certain vintage MBSs have unique characteristics, such as burnout, that make the vintage trade at a premium price. These unique characteristics are a result of how underlying assets in MBS are pooled. Most MBSs pool the underlying assets across certain geographical regions with similar terms to maturity and interest rates. This makes forecasting payment plans more predictable.

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DEFINITION of 'Buyout'
The purchase of a company's shares in which the acquiring party gains controlling interest of the targeted firm. Incorporating a buyout strategy is a common technique used to gain access to new markets and is one of the most common methods for inorganically growing a business.

INVESTOPEDIA EXPLAINS 'Buyout'
A leveraged buyout is accomplished by borrowed money or by issuing more stock. Buyout strategies are often seen as a fast way for a company to grow because it allows the acquiring firm to align itself with other companies that have a competitive advantage in a specific area.

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DEFINITION of 'Devaluation'
A deliberate downward adjustment to the value of a country's currency, relative to another currency, group of currencies or standard. Devaluation is a monetary policy tool of countries that have a fixed exchange rate or semi-fixed exchange rate. It is often confused with depreciation, and is in contrast to revaluation.

INVESTOPEDIA EXPLAINS 'Devaluation'
Devaluating a currency is decided by the government issuing the currency, and unlike depreciation, is not the result of non-governmental activities. One reason a country may devaluate its currency is to combat trade imbalances. Devaluation causes a country's exports to become less expensive, making them more competitive on the global market. This in turn means that imports are more expensive, making domestic consumers less likely to purchase them.

While devaluating a currency can seem like an attractive option, it can have negative consequences. By making imports more expensive, it protects domestic industries who may then become less efficient without the pressure of competition. Higher exports relative to imports can also increase aggregate demand, which can lead to inflation.

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DEFINITION of 'Joint Credit'
Credit issued to two or more people based on their combined incomes, assets and credit histories. Joint credit can be issued to multiple individuals or organizations. The parties involved accept joint responsibility for repaying the debt.

INVESTOPEDIA EXPLAINS 'Joint Credit'
Many married couples apply for joint credit. This is especially true with the purchase of a home. Joint credit is an issue and concern in divorce proceedings, under which the terms may give one partner responsibility for certain debts and the other partner responsibility for other debts. It is possible that subsequent to the divorce proceedings, the former partners may still affect one another's credit.

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DEFINITION of 'Four Cs'
The four characteristics used to determine the value of a diamond. The Four Cs of diamonds correspond to the carat, cut, clarity and color. The characteristics of a diamond are graded and categorized by the diamond industry to establish its retail value.

Cut refers to the diamond's reflective properties.
Clarity refers to the occurrence of inner flaws or inclusions in the diamond.
Color refers to the presence or absence of a diamond's color. Colorless diamonds allow more light to pass through than colored diamonds.
Carat refers to the weight of the diamond. Larger diamonds are exponentially more valuable because of their rarity.


INVESTOPEDIA EXPLAINS 'Four Cs'
The diamond certificate, which is also called a grading report, is considered the fifth C. The fifth C is a complete evaluation of a diamond that has been executed by qualified professionals using specialized gemological instruments. The certificate details the diamond's exact measurements, weight and details of its cut and quality. In addition, the certificate identifies the diamond's unique characteristics. The certificate describes the diamond's quality, but it does not place a monetary value on the stone.

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DEFINITION of 'Yellow Knight'
A company that was once making a takeover attempt but ends up discussing a merger with the target company. Yellow knights have various reasons for backing out of the takeover attempt, but frequently are attributable to the target company's ability to fend off takeover. The "yellow" in "yellow knight" may refer to the color's association with cowardice. Since a yellow knight backs down from a takeover attempt and retreats to merger discussions, a yellow knight may be viewed as weak.

INVESTOPEDIA EXPLAINS 'Yellow Knight'
In mergers and acquisitions (M&A), various colored knights are used to identify the nature of a takeover or potential takeover. A black knight is a company that makes a hostile takeover offer for the target company. A white knight makes a friendly takeover offer to a target company that is being faced with a hostile takeover. A gray knight (sometimes spelled grey knight) is a second unsolicited bidder in a corporate takeover.

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DEFINITION of 'Boutique'
A small financial firm that provides specialized services for a particular segment of the market. Boutique firms are most common in the investment management or investment banking industries. These firms may specialize by industry, client asset size, banking transaction type or by other factors to address a market not well addressed by larger firms.


INVESTOPEDIA EXPLAINS 'Boutique'
Smaller players in the financial segment can do well by positioning themselves to serve a niche. Although they may lack some of the resources of larger firms, boutique firms aim to offer more individualized services and tailor their offerings to the needs of their clients. Boutique firms are often started by former employees of larger firms who wish to strike out on their own. Working at a boutique firm can offer an alternative for finance workers who are looking for something different from the large firm experience.

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DEFINITION of 'Himalayan Option'
An exotic equity option belonging to a class known as mountain range options. Himalayan options are based on a basket of underlying securities, as opposed to the typical listed (vanilla) option, which has one underlying security.


INVESTOPEDIA EXPLAINS 'Himalayan Option'
The payout for a Himalyan option is based on the average performance of the underlying assets over the life of the option. Periodic measurement dates are established and on each date, a payout is made based on the best-performing security in the basket. This security is then removed from the basket. This process continues until a single security is left. The option's total payout is the sum of all the periodic payments.

Himalayan options can be extremely difficult to properly value because the payout is linked to a basket of securities. The content and volatility of the basket will change over time as securities are periodically eliminated. This is why Himalayan options are only held by large institutional investors, typically as a long-term hedge.

Asian options also have payouts based on average performance over the life of an option, but just one underlying security is used.

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The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing to sell, at a given time in the trading day. The touchline therefore specifies the best bid or ask for a particular security at any point in time. Very liquid securities will generally have a narrow bid-ask spread, while illiquid securities will have a wide spread.


INVESTOPEDIA EXPLAINS 'Touchline'
For example, if security A has various buyers who are bidding $5, $5.10 and $5.15 for it, the touchline bid price would be $5.15. At the same time, if security A has various sellers at $5.20, $5.30 and $5.35, the touchline ask price would be $5.20. The bid-ask spread on security A is therefore $5.15 (bid) / $5.20 (ask).

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DEFINITION of 'Grandfathered Activities'
Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United States, but which were acquired or engaged in before a particular date and are therefore subject to the older rules. Such activities may be continued under the "grandfather" clauses of the Bank Holding Company Act and the International Banking Act of 1978.


INVESTOPEDIA EXPLAINS 'Grandfathered Activities'
Any law can have a grandfather clause that allows the old rule to apply to existing situations and the new rule applies to all futures situations. To grandfather is to grant such an exemption.

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DEFINITION of 'Sin Tax'
A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. These type of taxes are levied by governments to discourage individuals from partaking in such activities without making the use of the products illegal. These taxes also provide a source of government revenue.

INVESTOPEDIA EXPLAINS 'Sin Tax'
Sin taxes are typically added to liquor, cigarettes and other non-luxury items. State governments favor sin taxes because they generate an enormous amount of revenue and are usually easily accepted by the general public because they are indirect taxes that only affect those who use the products. When individual states run deficits, the sin tax is typically one of the first taxes recommended by lawmakers to help fill the budget gap.