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Financial Terms | |
Moral hazard |
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Definition of Moral hazardMoral hazardThe risk that the existence of a contract will change the behavior of one or both parties to the
Related Terms:Accounting changeAn alteration in the accounting methodology or estimates used in Affirmative covenantA bond covenant that specifies certain actions the firm must take. All or noneRequirement that none of an order be executed unless all of it can be executed at the specified price. All-or-none underwritingAn arrangement whereby a security issue is canceled if the underwriter is unable American Stock Exchange (AMEX)The second-largest stock exchange in the United States. It trades Asset-specific RiskThe amount of total risk that can be eliminated by diversification by At-the-moneyAn option is at-the-money if the strike price of the option is equal to the market price of the ![]() Bankruptcy riskThe risk that a firm will be unable to meet its debt obligations. Also referred to as default or insolvency risk. Basis riskThe uncertainty about the basis at the time a hedge may be lifted. Hedging substitutes basis risk for Beta riskrisk of a firm measured from the standpoint of an investor who holds a highly diversified portfolio. Bill of exchangeGeneral term for a document demanding payment. Bullet contractA guaranteed investment contract purchased with a single (one-shot) premium. Related: Business riskThe risk that the cash flow of an issuer will be impaired because of adverse economic Call money rateAlso called the broker loan rate , the interest rate that banks charge brokers to finance Call riskThe combination of cash flow uncertainty and reinvestment risk introduced by a call provision. Cash settlement contractsFutures contracts, such as stock index futures, that settle for cash, not involving ![]() Change in Accounting EstimateA change in accounting that occurs as the result of new information Change in Accounting EstimateA change in the implementation of an existing accounting Change in Accounting PrincipleA change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures Change in Reporting EntityA change in the scope of the entities included in a set of, typically, consolidated financial statements. Changes in Financial PositionSources of funds internally provided from operations that alter a company's Chicago Mercantile Exchange (CME)A not-for-profit corporation owned by its members. Its primary Commercial riskThe risk that a foreign debtor will be unable to pay its debts because of business events, Commodities Exchange Center (CEC)The location of five New York futures exchanges: Commodity Company-specific riskRelated: Unsystematic risk Companyspecific RiskSee asset-specific risk Completed-Contract MethodA contract accounting method that recognizes contract revenue ![]() Completion riskThe risk that a project will not be brought into operation successfully. ComponentRaw materials or subassemblies used to make either finished goods Conditional sales contractsSimilar to equipment trust certificates except that the lender is either the Confirmationhe written statement that follows any "trade" in the securities markets. Confirmation is issued ContractA term of reference describing a unit of trading for a financial or commodity future. Also, the actual ContractA formal written statement of the rights and obligations of each party to a transaction. Contract AccountingMethod of accounting for sales or service agreements where completion contract manufactureran external party that has been granted an outsourcing contract to produce a part or component for an entity Contract monthThe month in which futures contracts may be satisfied by making or accepting a delivery. contract vendoran external party that has been granted an Contract Work Hours and Safety Standards ActA federal Act requiring federal contractors to pay overtime for hours worked exceeding 40 per week. Convertible exchangeable preferred stockConvertible preferred stock that may be exchanged, at the cost-plus contracta contract in which the customer agrees CounterpartiesThe parties to an interest rate swap. Counterparty riskThe risk that the other party to an agreement will default. In an options contract, the risk Country financial riskThe ability of the national economy to generate enough foreign exchange to meet Country risk GeneralLevel of political and economic uncertainty in a country affecting the value of loans or Credit riskThe risk that an issuer of debt securities or a borrower may default on his obligations, or that the Credit RiskFinancial and moral risk that an obligation will not be paid and a loss will result. Cross-border riskRefers to the volatility of returns on international investments caused by events associated Cumulative Effect of a Change in Accounting PrincipleThe change in earnings of previous years Cumulative Effect of Accounting ChangeThe change in earnings of previous years assuming Currency riskRelated: Exchange rate risk Currency risk sharingAn agreement by the parties to a transaction to share the currency risk associated with Default riskAlso referred to as credit risk (as gauged by commercial rating companies), the risk that an Diversifiable riskRelated: unsystematic risk. Dow Jones industrial averageThis is the best known U.S.index of stocks. It contains 30 stocks that trade on Dow Jones Industrial AverageIndex of the investment performance of a portfolio of 30 “blue-chip” stocks. economic components modelAbrams’ model for calculating DLOM based on the interaction of discounts from four economic components. Economic riskIn project financing, the risk that the project's output will not be salable at a price that will Effective Exchange RateThe weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country. Electronic data interchange (EDI)The exchange of information electronically, directly from one firm's electronic data interchange (EDI)the computer-to-computer transfer of information in virtual real time using standardized formats developed by the American National Standards Institute Embodied Technical ChangeTechnical change that can be used only when new capital embodying this technical change is produced. Engineering changeA change to a product’s specifications as issued by the engineering engineering change order (ECO)a business mandate that changes the way in which a product is manufactured or a Equation of ExchangeThe quantity theory equation Mv = PQ. Equilibrium market price of riskThe slope of the capital market line (CML). Since the CML represents the European Monetary System (EMS)An exchange arrangement formed in 1979 that involves the currencies Event riskThe risk that the ability of an issuer to make interest and principal payments will change because ExchangeThe marketplace in which shares, options and futures on stocks, bonds, commodities and indices Exchange controlsGovernmental restrictions on the purchase of foreign currencies by domestic citizens or Exchange of assetsAcquisition of another company by purchase of its assets in exchange for cash or stock. Exchange of stockAcquisition of another company by purchase of its stock in exchange for cash or shares. Exchange offerAn offer by the firm to give one security, such as a bond or preferred stock, in exchange for Exchange rateThe price of one country's currency expressed in another country's currency. exchange rateAmount of one currency needed to purchase one unit of another. Exchange Rate Mechanism (ERM)The methodology by which members of the EMS maintain their Exchange Rate, NominalThe price of one currency in terms of another, in this book defined as number of units of foreign currency per dollar. Exchange Rate, RealThe nominal exchange rate corrected for price level differences. Exchange rate riskAlso called currency risk, the risk of an investment's value changing because of currency Exchange riskThe variability of a firm's value that results from unexpected exchange rate changes or the Exchangeable SecuritySecurity that grants the security holder the right to exchange the security for the expectations theory of exchange ratesTheory that expected spot exchange rate equals the forward rate. Fallout riskA type of mortgage pipeline risk that is generally created when the terms of the loan to be Fiat MoneyFiat Money is paper currency made legal tender by law or fiat. It is not backed by gold or silver and is not necessarily redeemable in coin. This practice has had widespread use for about the last 70 years. If governments produce too much of it, there is a loss of confidence. Even so, governments print it routinely when they need it. The value of fiat money is dependent upon the performance of the economy of the country which issued it. Canada's currency falls into this category. Financial riskThe risk that the cash flow of an issuer will not be adequate to meet its financial obligations. financial riskrisk to shareholders resulting from the use of debt. FirmRefers to an order to buy or sell that can be executed without confirmation for some fixed period. Also, Firm commitment underwritingAn undewriting in which an investment banking firm commits to buy the Firm's net value of debtTotal firm value minus total firm debt. Firm-specific riskSee:diversifiable risk or unsystematic risk. Fixed-exchange rateA country's decision to tie the value of its currency to another country's currency, gold Fixed Exchange RateAn exchange rate held constant by a government promise to buy or sell dollars at the fixed rate on the foreign exchange market. Flat price riskTaking a position either long or short that does not involve spreading. Flexible Exchange RateAn exchange rate whose value is determined by the forces of supply and demand on the foreign exchange market. Floating exchange rateA country's decision to allow its currency value to freely change. The currency is not Floating Exchange RateSee flexible exchange rate. Floating-rate contractA guaranteed investment contract where the credit rating is tied to some variable Force majeure riskThe risk that there will be an interruption of operations for a prolonged period after a Foreign exchangeCurrency from another country. Foreign ExchangeThe currency of a foreign country. Foreign exchange controlsVarious forms of controls imposed by a government on the purchase/sale of Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit. |