Finance Terms

Straddle A straddle is an options trading strategy that involves buying or selling both a call option and a put option for the same stock, with the same strike price and expiration date. This strategy is used when a trader expects the stock to move significantly, but is not sure which direction it will go. Here’s how a long straddle works: the call option makes money if the stock price goes up. The put option makes money if the stock price goes down. If the stock moves sharply in either direction, one of the options can become very profitable. The goal is for the gain on one option to outweigh the cost of both. For example, imagine a company is about to announce earnings. You expect the stock to move a lot based on the news, but you don’t know whether the news will be good or bad. A long straddle lets you potentially profit either way, as long as the stock moves enough. However, if the stock price stays close to the strike price, both options could lose value. This is the m...

Flight to Quality Flight to quality refers to a shift in investor behavior during times of uncertainty. When markets become unstable or the economy shows signs of trouble, investors often move their money from riskier assets, like stocks or corporate bonds—to safer places, such as government bonds or cash. This move is driven by the desire to protect capital. In this context, "quality" usually means investments that have a lower chance of default and offer more stability. U.S. Treasury bonds, for example, are considered high-quality because they are backed by the U.S. government and are seen as very safe. A well-known example of flight to quality happened during the 2008 financial crisis. As banks collapsed and stock prices dropped, many investors rushed to buy U.S. Treasury bonds. This demand pushed Treasury prices up and their yields (interest rates) down. At the same time, riskier markets like corporate bonds and stocks became more volatile. Understanding this b...

Understanding M0, M1, and M2: Measures of the Money Supply Liquidity refers to how easily and quickly an asset can be converted into cash without a significant loss in value. Economists categorize a country's money supply into layers, M0 , M1 , and M2 —based on how liquid each type of money is. M0 is the monetary base, the foundation of all money in circulation. M1 includes money available for immediate spending. M2 adds “near money,” assets that can be converted into cash with minimal delay. M0: The Monetary Base M0 —also known as the monetary base , represents the most fundamental form of money created by a country’s central bank. It includes: Currency in circulation : Physical coins and banknotes held by the public. 💵 Bank reserves : Deposits that commercial banks hold at the central bank, plus vault cash. M0 forms the foundation of the money supply. When banks lend against these reserves, the supply of money expands into M1 and M2 . ...

Nonbank Financial Institutions (NBFIs): The New Face of Shadow Banking Nonbank Financial Institutions (NBFIs): The New Face of Shadow Banking Nonbank Financial Institutions (NBFIs), often associated with shadow banking , refer to the network of financial companies and activities that perform bank-like functions outside the traditional banking system. These entities engage in credit intermediation, liquidity transformation, and maturity transformation, but unlike banks, they generally lack direct access to central bank liquidity facilities and deposit insurance. What Are NBFIs? NBFIs are financial institutions that channel funds between investors and borrowers outside the regulated banking sector. According to the Financial Stability Board (FSB), the U.S. NBFI sector accounts for more than half of global nonbank financial assets, underscoring its global importance and systemic scale. Key participants include: Money Market Funds (...

Debasement Trade The “debasement trade” refers to an investment strategy or market positioning that anticipates a decline in the real value of fiat currencies due to monetary debasement , that is, when governments or central banks expand the money supply so aggressively that the currency’s purchasing power erodes. The term “debasement trade” is a modern Wall Street expression referring to positioning in assets that protect against the erosion of fiat currency value. In simpler terms, it’s a bet against paper money and for hard or scarce assets that are expected to retain or increase real value as fiat weakens. Key Concept: Monetary Debasement Monetary debasement occurs when: Central banks print large amounts of money, often through quantitative easing (QE) or deficit monetization; Governments run persistent fiscal deficits financed by debt issuance that the central bank absorbs; Real interest rates are negative (nominal rates below inflation), effectively penali...

Monetary Debasement Monetary debasement is when a currency loses its value or purchasing power over time. This means the same amount of money buys fewer goods and services than before. Two Forms of Debasement 1. Historical: Metal-Based Money In the past, money was made from precious metals like gold and silver. Rulers would reduce the amount of metal in each coin while keeping its stated value the same. For example, they might mint a silver coin with 90% silver instead of 100%. This allowed them to create more coins from the same amount of metal, often to fund wars or government spending. But the public noticed, and soon prices rose because people no longer trusted the coins to hold their value. 2. Modern: Fiat Currency 🏦 Today, most money is not backed by physical metal. Instead, governments and central banks can create currency digitally. When they increase the money supply too quickly, such as through money printing or quantitative easing, it leads to more dollars ch...