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J-curve

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Definition of J-curve

J-curve Image 1

J-curve

Theory that says a country's trade deficit will initially worsen after its currency depreciates because
higher prices on foreign imports will more than offset the reduced volume of imports in the short-run.



Related Terms:

runup

the period before a formal announcement of a takeover bid in which one or more bidders are either preparing to make an announcement or speculating that someone else will.


After-tax profit margin

The ratio of net income to net sales.


After-tax real rate of return

Money after-tax rate of return minus the inflation rate.


Agency theory

The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.


Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.



Asian currency units (ACUs)

Dollar deposits held in Singapore or other Asian centers.


Balance of trade

Net flow of goods (exports minus imports) between countries.


J-curve Image 1

Basket trades

Related: Program trades.


Block trade

A large trading order, defined on the New York Stock Exchange as an order that consists of
10,000 shares of a given stock or a total market value of $200,000 or more.


Blocked currency

A currency that is not freely convertible to other currencies due to exchange controls.


Book runner

The managing underwriter for a new issue. The book runner maintains the book of securities sold.


Bubble theory

Security prices sometimes move wildly above their true values.


Budget deficit

The amount by which government spending exceeds government revenues.


Cash flow after interest and taxes

Net income plus depreciation.


Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.


Counter trade

The exchange of goods for other goods rather than for cash; barter.


J-curve Image 2

Country beta

Covariance of a national economy's rate of return and the rate of return the world economy
divided by the variance of the world economy.


Country financial risk

The ability of the national economy to generate enough foreign exchange to meet
payments of interest and principal on its foreign debt.



Country risk General

Level of political and economic uncertainty in a country affecting the value of loans or
investments in that country.


Country selection

A type of active international management that measures the contribution to performance
attributable to investing in the better-performing stock markets of the world.


Currency

Money.


Currency arbitrage

Taking advantage of divergences in exchange rates in different money markets by
buying a currency in one market and selling it in another market.


Currency basket

The value of a portfolio of specific amounts of individual currencies, used as the basis for
setting the market value of another currency. It is also referred to as a currency cocktail.


Currency future

A financial future contract for the delivery of a specified foreign currency.


Currency option

An option to buy or sell a foreign currency.


Currency risk

Related: Exchange rate risk


Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying
transaction.


Currency selection

Asset allocation in which the investor chooses among investments denominated in
different currencies.



Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency
for a series of specified payment obligations denominated in a different currency.


Deficit

An excess of liabilities over assets, of losses over profits, or of expenditure over income.


Devaluation A decrease in the spot price of the currency



Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different
currency.


Eurocurrency deposit

A short-term fixed rate time deposit denominated in a currency other than the local
currency (i.e. US$ deposited in a London bank).


Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.


European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 European currencies,
originally devised in 1979.


Flat trades

1) A bond in default trades flat; that is, the price quoted covers both principal and unpaid,
accrued interest.
2) Any security that trades without accrued interest or at a price that includes accrued
interest is said to trade flat.


Floor trader

A member who generally trades only for his own account, for an account controlled by him or
who has such a trade made for him. Also referred to as a "local".


Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.


Foreign bond

A bond issued on the domestic capital market of anther company.


Foreign bond market

That portion of the domestic bond market that represents issues floated by foreign
companies to governments.


Foreign currency

foreign money.


Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.


Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the
reporting currency of the parent company in order to prepare consolidated financial statements.


Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.


Foreign equity market

That portion of the domestic equity market that represents issues floated by foreign companies.


Foreign exchange

currency from another country.


Foreign exchange controls

Various forms of controls imposed by a government on the purchase/sale of
foreign currencies by residents or on the purchase/sale of local currency by nonresidents.


Foreign exchange dealer

A firm or individual that buys foreign exchange from one party and then sells it to
another party. The dealer makes the difference between the buying and selling prices, or spread.


Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.


Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.


Foreign market

Part of a nation's internal market, representing the mechanisms for issuing and trading
securities of entities domiciled outside that nation. Compare external market and domestic market.


Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.


Foreign Sales Corporation (FSC)

A special type of corporation created by the Tax Reform Act of 1984 that
is designed to provide a tax incentive for exporting U.S.-produced goods.


Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.


Forward trade

A transaction in which the settlement will occur on a specified date in the future at a price
agreed upon the trade date.


Goodwill

Excess of the purchase price over the fair market value of the net assets acquired under purchase
accounting.


Hard currency

A freely convertible currency that is not expected to depreciate in value in the foreseeable future.


Informationless trades

trades that are the result of either a reallocation of wealth or an implementation of an
investment strategy that only utilizes existing information.


Information-motivated trades

trades in which an investor believes he or she possesses pertinent
information not currently reflected in the stock's price.


Liquidity theory of the term structure

A biased expectations Theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future interest rates because they embody a
liquidity premium.


Local expectations theory

A form of the pure expectations Theory which suggests that the returns on bonds
of different maturities will be the same over a short-term investment horizon.


Long run

A period of time in which all costs are variable; greater than one year.
Long straddle A straddle in which a long position is taken in both a put and call option.


Long run

A period of time in which all costs are variable; greater than one year.


Market prices

The amount of money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.


Market segmentation theory or preferred habitat theory

A biased expectations Theory that asserts that the
shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.


Modern portfolio theory

Principles underlying the analysis and evaluation of rational portfolio choices
based on risk-return trade-offs and efficient diversification.


Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to
another currency on a rollover date.


Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.


Mutual offset

A system, such as the arrangement between the CME and SIMEX, which allows trading
positions established on one exchange to be offset or transferred on another exchange.


Normal backwardation theory

Holds that the futures price will be bid down to a level below the expected
spot price.


Offset

Elimination of a long or short position by making an opposite transaction. Related: liquidation.


On the run

The most recently issued (and, therefore, typically the most liquid) government bond in a
particular maturity range.


Posttrade benchmarks

prices after the decision to trade.


Preferred habitat theory

A biased expectations Theory that believes the term structure reflects the
expectation of the future path of interest rates as well as risk premium. However, the Theory rejects the
assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for
and supply of funds does not match for a given maturity range, some participants will shift to maturities
showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium
whose magnitude will reflect the extent of aversion to either price or reinvestment risk.


Pre-trade benchmarks

prices occurring before or at the decision to trade.


Prices

Price of a share of common stock on the date shown. Highs and lows are based on the highest and
lowest intraday trading price.


Price-volume relationship

A relationship espoused by some technical analysts that signals continuing rises
and falls in security prices based on accompanying changes in volume traded.


Program trades

Also called basket trades, orders requiring the execution of trades in a large number of
different stocks at as near the same time as possible. Related: block trade


Publicly traded assets

Assets that can be traded in a public market, such as the stock market.


Pure expectations theory

A Theory that asserts that the forward rates exclusively represent the expected
future rates. In other words, the entire term structure reflects the markets expectations of future short-term
rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related:
biased expectations theories


Registered trader

A member of the exchange who executes frequent trades for his or her own account.


Reporting currency

The currency in which the parent firm prepares its own financial statements; that is, U.S.
dollars for a U.S. company.


Reserve currency

A foreign currency held by a central bank or monetary authority for the purposes of
exchange intervention and the settlement of inter-governmental claims.


Reversing trade

Entering the opposite side of a currently held futures position to close out the position.


Run

A run consists of a series of bid and offer quotes for different securities or maturities. Dealers give to and
ask for runs from each other.


Selling short

If an investor thinks the price of a stock is going down, the investor could borrow the stock from
a broker and sell it. Eventually, the investor must buy the stock back on the open market. For instance, you
borrow 1000 shares of XYZ on July 1 and sell it for $8 per share. Then, on Aug 1, you purchase 1000 shares
of XYZ at $7 per share. You've made $1000 (less commissions and other fees) by selling short.


Short

One who has sold a contract to establish a market position and who has not yet closed out this position
through an offsetting purchase; the opposite of a long position. Related: Long.


Short bonds

Bonds with short current maturities.


Short book

See: unmatched book.


Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: Long hedge.


Short interest

This is the total number of shares of a security that investors have borrowed, then sold in the
hope that the security will fall in value. An investor then buys back the shares and pockets the difference as profit.


Short position

Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed,
before the sale, to make "good delivery" to the buyer. Eventually, the shares must be bought to close out the
transaction. This technique is used when an investor believes the stock price will go down.


Short sale

Selling a security that the seller does not own but is committed to repurchasing eventually. It is
used to capitalize on an expected decline in the security's price.


Short selling

Establishing a market position by selling a security one does not own in anticipation of the price
of that security falling.


Short squeeze

A situation in which a lack of supply tends to force prices upward.


Short straddle

A straddle in which one put and one call are sold.


Shortage cost

Costs that fall with increases in the level of investment in current assets.


Shortfall risk

The risk of falling short of any investment target.


Short-run operating activities

Events and decisions concerning the short-term finance of a firm, such as
how much inventory to order and whether to offer cash terms or credit terms to customers.


Short-term financial plan

A financial plan that covers the coming fiscal year.



 

 

 

 

 

 

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