Financial Terms Part 2

Here are some additional financial terms you might like to understand. Although they are slightly more complicated than basic financial terms.

Hedging - is a strategy used to minimize exposure to an unwanted business risk in volatile economies. A hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment eg. a buyer of a equipment and a seller trading

One use of derivatives is to be used as a tool to transfer risk by taking the opposite position in the underlying asset. For example, a wheat farmer and a wheat miller could enter into a futures contract to exchange cash for wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the wheat miller, the availability of wheat.

Hedge Funds

Derivative - a financial instrument whose value is derived from value of an underlying variable. The variable here can be based on different types of assets such as commodities, equities or stocks, bonds, interest rates, exchange rates or even indexes e.g. stock market index, consumer price index.

Deviatives are traded just like the underlying variable.

Securitization - a process that involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors

Mortgage-backed security - an asset-backed security whose cash flows are backed by the principal and interest payments of a pool of mortgage loans.