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Some Words To Invest By
Arbitrage: The process of driving prices of related assets, or the same assets in different markets, toward consistency by purchasing assets when cheap in one market and selling them when dear in another.
Bail In: When the private sector is encouraged—through pressure tactics or the placement of conditions on official support—to participate with its own funds in providing financial relief for a troubled debtor.
Bail Out: When loans or grants are provided—usually by a government, central bank, and/or multilateral institution (such as the International Monetary Fund)—to help a nation, company, or individual remain solvent.
Derivatives: Financial instruments whose value depends on the value of underlying investments, indices, or assets. Futures and stock options are two common types of derivatives.
Due Diligence: The process of research—performed by investors— into the details of a potential investment.
Hedge Funds: Largely unregulated and privately managed investment funds that are permitted to use aggressive financial strategies that are prohibited to mutual funds.
Lender of Last Resort: Traditionally, an entity, government, or national central bank that extends credit to an illiquid, but uninsured, financial institution to prevent its failure. More recently, there have been proposals for governments or multilateral institutions to play a similar role for sovereign borrowers.
Long-Term Capital Flows: The movement of capital from one country to another with a maturity that is longer than one year. Examples include direct investments in fixed assets such as manufacturing plants and long-term portfolio investments in stocks and bonds.
Moral Hazard: The impact that insurance, whether it is implicit or explicit (including lender-of-last-resort activity), may have in increasing the risks (or hazard) that investors may undertake in lending strategies.
Short-Term Capital Flows: The movement of capital from one country to another with a less than one-year maturity. Examples include short-term loans and liquid investments in stock markets.