A Humorous look at the Sub Prime Crisis

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“The thing to remember is that these markets are run by very clever and sophisticated people…” “It has some good words in it, like high.” “Yes, high is a good word, better than low anyway.” Very sharp commentary on the sub prime crisis. The scary thing is that there is very little exaggeration at all! …

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Exchange Rate Predictions

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Predicting exchange rates is not as easy as some experts may suggest. There are many factors at work in determining exchange rates – economic fundamentals are only part of the equation. To predict future exchange rate movements we need to look at a variety of factors. The most important include:

Interest Rate Movements.

Interest rates have the biggest single effect in determining exchange rates. Higher interest rates make it more desirable to save money in that particular country. This causes an inflow of hot money which leads to an appreciation in the exchange rate. International hot money flows account for a high % of capital flows.

Economic Prospects

Linked to interest rates is the general economic prospects of an economy. If an economy is slowing down, due to say falling house prices, it is likely that interest rates will fall. This is because when the economy slows down, inflation falls allowing Central Banks to cut interest rates. E.g. slower growth in the US has caused expectations of interest rates to fall, this in turn has led to the devaluation of the dollar.

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What is Amoritisation?

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Readers Question: What is  Amortisation? Amortisation is the running down of a loan through regular payments. A good example is a capital repayment mortgage. In this case, the homeowner pays monthly instalments paying both interest on the loan and also capital repayments. This means that after 30 years the loan will be paid off. The …

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Different Stock Market Indices

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The different Stock Market Indexes in the UK

  • FT 30. This is the oldest stock market index in existence. It came into existence in 1935. It is an index of the 30 biggest and most important companies listed on the stock market. It is not size alone that leads to inclusion. A cross section of firms has sought to be included in the index. It started with an index of 100 in 1935. All shares count equally, it is not weighted according to market capitalization. Therefore, it acts as a sensitive barometer to the mood of the market. List of FT 30 Companies
  • FTSE-100. The FT30 has been superseded in importance by the FTSE-100. ‘Financial Times, Stock Exchange top 100 list of companies. With 100 companies it gives a broader picture of the market sentiment. It is used as the ‘headline figure for the UK stock market. The FTSE-100 comprises 82% of market capitalisation. List of Companies in the FTSE-100

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Definition: Investment, Investor and Savings

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In economics, the definition of investment is quite strict. Investment means an increase in the capital stock – Gross fixed capital formation. Investment can involve The purchase of a larger factory The purchase of new automated machines to take part in the productive process. The purchase of new computers in a bank. The building of …

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Definition of Hedging

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Definition of Hedging – Setting up an investment positions which helps to protect against losses from a related investment.

For example, if you export goods to the US, an appreciation in the exchange rate can make your exports uncompetitive. Therefore, you can hedge against your position by buying Sterling futures. If sterling appreciates, your exports become uncompetitive, but you benefit from the rise in the value of Sterling.

When weighing up what to buy and where to invest some speculators may wish to hedge against risky investment.

A simple way to engage in hedging is to buy a safe asset for every risky asset. However, some people may want to hedge against a particular investment. This can be done by using derivatives.

Hedging with Put Options

An example is using a put option. This gives the owner the right, but not the obligation, to sell at a certain fixed price, before a certain date.

This means that if the share price falls more than the agreed price (striking price) then you can sell it.

Example, suppose you buy shares in ICI for 100p, hoping they will increase in value. To hedge, you could also take out a put option, which gives you the right to sell shares in ICI for 80p in the next 6 months. This means that if shares in ICI fall by 30%, the investor can sell at 80p.

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Police and Fire Services as Public Goods

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Q. Use economics and political theory to explain why the fire and rescue service should be provided by the state. I don’t want the answer….I just don’t understand what this means.

This revolves around a fundamental debate in economics – How much should the government intervene in the economy?

Ideally, goods and services would be provided in a free market without requiring any government intervention. Market provision is considered superior because there is less bureaucracy and more incentives for firms to be efficient.

However, there are some goods and services which will be under-provided in a free market. (Some goods may not be provided at all). This is considered a type of market failure and therefore for several reasons people argue the government should step in and provide it.

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Sticky Inflation

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Sticky inflation is an undesirable economic situation where there is a combination of stubbornly high inflation, (and often stagnant growth).   Sticky inflation is often associated with cost-push factors, i.e. factors which cause a rise in the inflation rate but also lead to lower spending and economic growth. Sticky inflation is also sometimes known as Stagflation …

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