- Industry: Economy; Printing & publishing
- Number of terms: 15233
- Number of blossaries: 1
- Company Profile:
Testing your plans against various possible scenarios to see what might happen should things not go as you hope. Scenario analysis is an important technique in risk management, helping firms and especially financial institutions to ensure that they do not take on too much risk. Its usefulness does of course depend on risk managers coming up with the right scenarios.
Industry:Economy
The cost of finding what you want. The economic cost of buying something is not simply the price you pay. Finding what you want and ensuring that it is competitively priced can be expensive, be it the financial cost of physically getting to a marketplace or the opportunity cost of time spent fact-finding. Search costs mean that people often take decisions without all the relevant information, which can result in inefficiency. Technological changes such as the internet may sharply reduce search costs, and thus lead to more efficient decision making.
Industry:Economy
There are seasonal patterns in many economic activities; for instance, there is less construction in winter than in summer, and spending in shops soars as Christmas approaches. To reveal underlying trends, statistics reflecting only part of the year are often adjusted to iron out seasonal variations.
Industry:Economy
A market in second-hand financial instruments. Bonds and shares are first sold in the primary market, for instance, through an initial public offering. After that, their new owners often sell them in the secondary market. The existence of liquid secondary markets can encourage people to buy in the primary market, as they know they are likely to be able to sell easily should they wish.
Industry:Economy
As we do not live in a perfect world, how useful are economic theories based on the assumption that we do? Second-best theory, set out in 1956 by Richard Lipsey and Kelvin Lancaster (1924–99), looks at what happens when the assumptions of an economic model are not fully met. They found that in situations where not all the conditions are met, the second-best situation – that is, meeting as many of the other conditions as possible – may not result in the optimum solution. Indeed, reckoned Lipsey and Lancaster, in general, when one optimal equilibrium condition is not satisfied all of the other equilibrium conditions will change. Potentially, the second-best equilibrium may be worse than a new equilibrium brought about by government intervention, either to restore equilibrium to the market that is in disequilibrium, or to move the other markets away from their second-best conditions. Economists have seized on this insight to justify all sorts of interventions in the economy, ranging from taxing certain goods and subsidizing others to restricting free trade. Whenever there is market failure, second-best theory says it is always possible to design a government policy that would increase economic welfare. Alas, the history of government intervention suggests that although the second best may be improved on in theory, in practice second best is often least worst.
Industry:Economy
Financial contracts, such as bonds, shares or derivatives, that grant the owner a stake in an asset. Such securities account for most of what is traded in the financial markets.
Industry:Economy
Turning a future cashflow into tradable, bond-like securities. Creating such asset-backed securities became a lucrative business for financial firms during the 1990s, as they invented new securities based on cashflow ranging from future mortgage and credit-card payments to bank loans, movie revenue and even the royalties on songs by David Bowie (so-called Bowie-bonds). Securitization has many benefits, at least in theory. Issuers gain instant access to money for which they would otherwise have to wait months or years, and they can shed some of the risk that their expected revenue will not materialize. By selling securitized loans, investment banks are able to finance their customers without tying up large amounts of capital. Investors can hold a new sort of asset, less risky than unsecured bonds, giving them the risk-reducing benefit of diversification. But there are dangers. The future cashflow underlying the securities may flow earlier or later than promised, or not at all.
Industry:Economy
Traditionally, the profit rulers made from allowing metals to be turned into coins. Now it refers in a loosely defined way to the power of a country whose notes and coins are held by another country as a reserve currency.
Industry:Economy
A market in which the seller seems to have the upper hand and so can charge a higher price than in a.
Industry:Economy
The order in which creditors are entitled to be repaid. In the event of a bankruptcy, senior debt must be paid off before junior debt. Because junior debt has a lower chance of being repaid than senior debt, it carries more risk, and thus typically pays a higher yield.
Industry:Economy
