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Currency peg

Definition: Currency peg can be defined as the exchange rate policy of a country

framed by its Central Bank to peg the exchange rate of its currency to either a

currency of another country or a basket of currencies. The currency may also

sometimes be pegged to the value of gold. This is also known as fixed currency

rate.

Explanation: Currency peg is also referred to as pegged exchange rate system. A

pegged exchange rate system has its own set of advantages and disadvantages. A

pegged exchange rate system is adopted by a Government to stabilize the value

of its currency and reduce volatility by fixing the value of the currency with that of

a more global prevalent currency, for instance, U.S. dollar. Under such a scenario,

the exchange rate does not change with change in domestic market conditions

and trade between two zones becomes more predictable and easy. As a result,

currency pegs helps exporters and importers to ascertain as to what exchange

rate they can expect for their transactions that they carry out. However, such a

system has its own set of limitations. This may lead to an inefficient allocation of

resources and the cost of intervention by the Government is reflected or rather

imposed upon the foreign exchange market.

Explanation: Countries like Bahrain, Cuba and Jordan have pegged their

respective domestic currencies with U.S. dollar.

Crony Capitalism

Definition: Crony capitalism refers to an economy wherein the business fraternity

and the Government are closely linked to each other. The growth of the business

is dependent on the favours obtained from the Government in the form of tax

breaks, grants and other incentives.

Explanation: A sector of an economy may be prone to crony capitalism, even if

the economy as a whole may be competitive. This is most common in natural

resource sectors through the granting of mining or drilling concessions, where the


Government agencies in charge of regulating an industry, gradually comes under

the control of that industry. Under the worst scenario, crony capitalism can result

into corruption, where any instance of a free market is dispensed with.

Unscrupulous practice by Government officials and tax evasion by business

houses are common which is seen in many underdeveloped countries. Under such

a scenario, Governments may favour one set of business owners who have close

ties to the Government over others. This may also be done with racial, religious,

or ethnic favoritism.

Cooling-Off Period

Definition: Cooling-off period is an interval period to settle the disputes or

discrepancies if any between two parties. It is also a period when the buyer can

cancel or reverse the transaction if the product is not as per the specifications or

expectations.

Explanation: During the cooling-off period, both parties can have negotiation and

reduce the tension if any in a way to take the agreement a step further. On the

other hand, cooling-off period is given to the consumer because there is a

probability that after buying, consumer may not be satisfied with the product

experience or it is not as per the expectations/specifications. The number of days

in cooling-off period depends upon the type of transaction both the parties have

entered into. Although the facility is very beneficial to the buyers, it is also

advantageous from the seller point of view because it actually increases the risk-

impulse purchases. When consumer buys a product without considering the

consequences of the buy it is said to be impulse purchase. Cooling-off period

although increases product sales but it also increases the chances of returns,

which may not be a good sign.

Example: In India, many e-commerce websites like Flipkart, Snapdeal and Amazon

India provide 7, 10 or 30 day replacement guarantee (cooling-off period) if the

product is damaged, defective or not as described. The return policy may defer

depending upon the websites and the type of products.


Commoditisation

Definition: Commoditisation refers to the process wherein a product or service

becomes so common that it loses its brand uniqueness. As a result, consumers no

longer differentiate between brands.

Explanation: Commoditisation occurs when a market for a product or service gets

saturated among its manufacturer or providers and their distributors. As a result,

competition increases among producers/providers to provide high quality

products, yet at lower prices. Hence commoditization is beneficial for the

consumers as they can now choose between all these different brands without

having to spend time doing a comparison, since the quality difference will not be

substantial. However, it places a huge challenge before the

manufacturers/producers. In order to survive commoditisation of a company’s

product or service, the company must have a viable strategy.

Formula: Products like edible oil, soaps and washing powder can come under

commoditization where there is high competition and no substantial quality

difference.

Capital Fulcrum Point

Definition: Capital Fulcrum Point (CFP) is a formula used in the valuation of

warrants. It is used to determine the minimum annual percentage growth

required from the value of the underlying ordinary shares for investors to hold

warrants in a company's shares in preference to holding the shares themselves.

Explanation: CFP takes into account the warrant’s time value, intrinsic value and

maturity as the indicator. It is mainly used as a comparative measure among

various warrants. Despite warrants having varying characteristics, the CFP

calculation normalises many of these (i.e. premium and maturity) to allow

warrants to be directly compared against each other. The CFP also allows direct


comparison of the warrant with the underlying shares. However, it may be

inconclusive in some cases.

Formula: The formula for calculating CFP is as follows:

CFP= [{exercise price/ (asset price-(warrant price X cover ratio)} 1/y -1] X 100%

Where y= years remaining for maturity

Bubble

Definition: Bubble can be defined as an economic cycle wherein prices of an asset

or combination of assets surge significantly above their fundamental value.

Explanation: In bubble stage, equity stock prices rise far above the value

warranted by the fundamentals due to investor frenzy. The investors believe that

demand for the stocks will continue to rise or that the stock will become

profitable in short term. Both of these scenarios result in rise in stock prices. The

stage will persist until prices go into freefall and the bubble bursts. Dotcom

bubble in 2000.

Black Economy

Definition: Black Economy refers to unaccounted business deals that go

untraceable (hence non taxable) by the revenue authority. As a result, such deals

do not get reflected in computation of a nation’s Gross Domestic Product. Black

economy is also known as parallel economy, shadow economy, or underground

economy.

Explanation: Black economy stems from various segments of the society. It may

employ illegal or even criminal procedures at times. Such practice may also be

employed where legitimate expression of entrepreneurial activity is made

unnecessarily difficult by a maze of regulations. At corporate level, the key

personnel may use unscrupulous methods to earn black money at the cost of

majority share holders. Moreover, corrupted officials and institutions may take

bribes from foreign companies and may park the money abroad in tax havens for


transferring to India when needed. Many times locally earned funds/collections

are also routed abroad through hawala channels for evading Indian tax authorities

and consequent legal implications.

In recent times, several global allies have joined hands with the Indian

Government to fight black money. Countries like Germany, France, Switzerland,

Singapore, Mauritius and the British Virgin Islands are among those that are

providing information, or will soon start doing so, on assets held by Indians,

helping the Indian Government in its campaign to bring down unaccounted

wealth.

Autarky

Definition: Autarky can be defined as an entity or a nation that is self sufficient in

itself and exists on its own in an independent manner without any external aid.

Explanation : The work Autarky comes from the Greek word Autarkeia which

means self sufficient. Autarky exists when the concerned nation or entity is in a

state of self sufficiency and does not participate in international trade. Even if the

nation participates in international trade there are restrictions in place. When an

economy which is self sufficient in nature refuses to undertake any trading

activities with the foreign countries then such an economy is termed as closed

economy. It needs to be noted that Autarky is not necessarily an economic

phenomenon. For example, military autarky may exist within an economy when

the concerned country is able to defend itself without any help from other

countries. A country is also said to have attained military autarky when it is able

to manufacture all the necessary weaponry without importing any of it from the

foreign countries.

Example: In today’s scenario example of complete economic autarky is very much

rare. North Korea may be considered as an example as its Government tries to

maintain a domestic localized economy. However, North Korea carries out

extensive trade with Russia, China, Syria, Vietnam and China. Albania almost

became an autarky in 1976 when its leader instituted a policy of self reliance.


While outside trade increased after the death of the leader, severe restrictions

were put in place until 1991.

Wasting Asset

Definition: Wasting Asset can be defined as an asset which has a limited life and

loses value with time. In such cases, accountants quantify the amount by which

the value of the asset declines by assigning a depreciation schedule to wasting

assets. Accountants do so by taking into consideration the decline in value each

year.

Explanation: Every asset has a definite time period which depends on the

productive capacity. As the asset gets used, the value of the asset depreciates

having a very little or no residual value. The asset during this period of

depreciation is known as wasting asset. It needs to be noted that all types of

assets depreciate and this is inevitable.

Example : Assets which fall under the domain of natural resources like gas and

timber can be taken as examples of wasting assets which are eventually used up

and have very little or no remaining value.

Misery Index

Definition: Misery Index can be defined as a parameter of economic well-being

for a specified country. Misery index of a country is obtained by taking the sum of

the unemployment rate and the inflation rate for a given period.

Explanation: Misery index was invented by Arthur Okun, who used it to

characterize the particular economic condition. Here the basic assumption is that

an increasing unemployment rate and a relatively high rate of inflation will

adversely affect the economic growth of the country. This is because a high rate

of inflation coupled with high unemployment rate weighs on the consumer

expenditure. When consumer expenditure comes down, demand also comes

down which ultimately affects production and weighs on the economic growth of


the country. Higher the percentage, worse is the economic condition and vice-

versa. A paper titled “Preferences over Inflation and Unemployment: Evidence

from Surveys of Happiness” published in the American Economic Review suggest

that unemployment causes 1.7 times more misery than that of inflation. Hence it

is suggested that misery index should be calculated by multiplying unemployment

by 1.7 and then adding it to the inflation rate.

Example : According to Bloomberg, for 2015 Venezuela is the country having the

highest misery index in the world followed by Argentina, South Africa, Ukraine

and Greece.

Fiscal Neutrality

Definition: Fiscal neutrality can be defined as a phenomena in which taxes and

government spending are neutral such that there will be no effect on demand.

Fiscal neutrality results in a condition in which demand is neither diminished nor

boosted by government spending or taxation.

Explanation: Fiscal neutrality is the outcome of a balanced budget. Under a

balanced budget, the spending undertaken by the Government is almost covered

by revenue generated from taxes such that the government spending is equal to

the tax revenue. It needs to be noted that when the Government spending is

more than the revenue generated from taxes, then the Government is said to be

running a fiscal deficit. In case of a fiscal deficit, the Government has to borrow

money to cover the shortfall. However, when revenue from taxes exceeds

Government spending then a fiscal surplus results and the excess money can be

invested for productive economic activities.

According to the European Union, fiscal neutrality implies that the tax should

impact all in the same manner irrespective of the activity one is carrying out. If

one particular person finds that the burden of tax to be more than that of others,


then taxation structure would distort the competitive nature of the market and

adversely affect the proper working of the market.

Debt Forgiveness

Definition: Debt forgiveness can be defined as a process by virtue of which a debt

is cancelled or rescheduled in order to lower the debt burden of the concerned

borrower. Debt forgiveness is also adopted to provide relief to the relatively poor

countries of their financial problems.

Explanation: Debt forgiveness is adopted when it is observed that the concerned

country has accumulated so much debt that the Government of the country has

very little money to spend on its social sector schemes that will help to eradicate

poverty and boost growth of its economy. Thus debt relief helps the country to

spend its funds on education, building infrastructure and boost other key

economic activities within the country. However, it needs to be noted that Debt

forgiveness has its own sets of limitations as well. Debt forgiveness may lead to a

sense of complacency among such countries where such poor countries may feel

that they may borrow as much they like without requiring to repay the amount.

As a result there have been arguments among experts and policymakers that debt

relief should come with a conditionality in which debt forgiveness will only be

granted when the concerned country agrees to implement economic reformatory

measures.

Example: The Chinese President till recently has pledged that it would write off

Inter-Governmental interest-free loans owed to China by the least-developed,

small island nations and other most heavily debt-burdened countries which is due

in 2015. The Chinese President further added that it would commit initially $2

billion to establish an assistance fund that will help to meet the post-2015 goals in

areas such as education, health care and economic development and then it

would increase the fund to $12 billion by 2030.


Credit Crunch

Definition: Credit crunch can be defined as an economic situation in which there

is a lack or paucity of funds in the credit market. Under such a situation it

becomes very difficult for both consumers and corporate organizations to obtain

financing from banks and other traditional institutions for their business or

investment purpose.

Explanation : Credit crunch develops when banks and other lending institutions

do not extend loans as they do under a normal economic scenario. Whatever

loans they do extend they charge extremely high interest rates for it. Loans are

given to only those people and corporate organizations that have excellent credit

history and have deposited lots of assets as collateral to the loan. Under such a

situation credit crunch becomes synonymous with the old saying which says that

the only people that bank gives loan are those people who don’t need a loan.

Banks and lending institutions may become hesitant in giving out loans because

they may have incurred significant losses from their previous loans. Losses are

incurred when the concerned borrowers default or the properties underlying the

loan as collateral undergoes significant erosion in value. In such cases, banks

attempt to regain their funds given out as loan by selling the property in the

market. However, in that case also banks suffer as they are selling it at a loss. The

other reason when credit crunch takes place is when the regulatory body or the

Central Bank increases the capital reserve requirements (or any other such

regulatory requirement). Banks in such case cut lending requirements for

compliance with regulatory norms.

Example : According to Professor Richard Rumelt, during the past 50 years there

have been 28 instances of severe house-price boom-bust cycles and 28 credit

crunches situations in 21 advanced Organization for Economic Co-operation and

Development (OECD) economies.


Competitive advantage

Definition : Competitive advantage can be defined as an advantage that a

company has over other competitors in a market by offering their products or

services at lower prices or by providing improved benefits or services that justifies

the high price of the same.

Explanation : According to Michael Porter, there are two types of competitive

advantage namely cost advantage and differential advantage. Comparative

advantage or cost advantage can be defined as the advantage that a firm has

when it is able to produce goods or services at a lower cost than that of its

competitors. A differential advantage is the advantage that a firm gains when the

benefits offered by the product or service is more that of its competitors. Various

business strategies are adopted by the organizations to attain competitive

advantage. Cost leadership is a strategy in which the company produces on a

large scale to become the lowest cost producer in the country. Differentiation

focus is a strategy that a company adopts to differentiate its product within a

small number of target market segments. Differentiation leadership is a strategy

that the company adopts to achieve competitive advantage across the whole of

an industry.

Example : Walmart has cost advantage over its competitors which can be

attributed to their highly efficient supply chain infrastructure, warehouse

facilities, and high tech inventory systems. Google has a differential advantage

which can be attributed to its superior infrastructure database management and

data processing capabilities.

Command Economy

Definition : Command economy can be defined as an economy in which the

Government of a country assumes complete power over the financial

management of the same.


Explanation : Command economy is an economy in which the Government takes

up the required power and responsibility and decides what goods and services are

to be produced, how they should be produced and at what price they are going to

be offered to the general public at large. Command economy has its own set of

advantage and disadvantages. A command economy curbs monopolies and since

the Government regulates as to how much needs to be produced wastage of

resources is minimal. Since prices are also regulated by the Government, price

inflation is also at comfortable levels. Besides, public welfare is the primary

objective of the Government and hence greed or personal gain is not the main

objective behind business practices and pricing policies. However, in a command

economy everybody is considered to be equal and hence one cannot get financial

security or obtain any of their own personal goals because the government

doesn’t allow it. Crime rates are also high in such economies when the

government bans a specific product or makes the selling of such product very

expensive.

Example : The economies of China, Cuba, North Korea, and the Soviet Union can

all be considered as examples of modern day command economies.

Classical Economics

Definition : Originated during the late 18th century, Classical Economics

emphasises that free markets or free competition was better than widely

accepted government interference or protectionism in that scenario.

Explanation : The theory was first considered by Adam Smith and extended by

David Ricardo, Thomas Malthus and John Stuart Mill. The fundamental concepts

and principles of classical economics began its journey in Adam Smith’s An Inquiry

into the Nature and Causes of the Wealth of Nations (1776).

The basis of the theory was that, free trade and free competition should be

conducted without the intervention of government. This would be the best way

to promote a nation’s economic growth. Smith showed how competitive buying

and selling resulted into systematic economic cooperation which can fulfil


individuals’ needs and increase their wealth. In a free trade system, through a

process of individual choice both seller and buyer will agree if it is profitable for

the former and beneficial for the latter.

Buyer's market , Seller’s market

Definition : A buyer’s market can be defined as a market which has more sellers

than buyers. Since the number of sellers is more than that of buyers, low prices

result due to excess of supply over demand.

Explanation : From the perspective of buyers and sellers there are generally two

types of markets namely buyer’s market and seller’s market. In a buyer’s market,

the buyers have the upper hand over the sellers as the supply of a particular

product is more than that of demand. Since, supply is more than that of demand,

buyers can consider a lot of options before making a purchasing decision.

However, in a seller’s market, demand outweighs supply and as a result prices go

up. As a result, the seller has the upper hand over the buyer and the buyer in this

case is quick to make an offer to the seller to secure the concerned product.

Example : It needs to be noted that during the early-to-mid 2000s, there was a

housing bubble and the real estate market in U.S. was a seller‘s market. At that

point of time real estate property was high in demand and was likely to sell even

if the price of the property was overpriced or not in the best condition. In many

cases, real estate property would receive multiple offers from different buyers

and the price would be above the initial asking price of the seller. However, when

the housing bubble burst and subsequently markets crashed, prices of real estate

property plummeted. As a result, the real estate market which was initially a

seller’s market got converted into a buyer’s market.

Business Confidence Index

Definition : It is a type of an economic barometer, which indicates the optimism

and pessimism that all the surveyed business managers feel about the near term

prospects of their organisations.


Explanation : A survey of selected business managers is conducted at fixed

intervals i.e., monthly or quarterly basis. It is a type of a leading indicator, which

reveals the futuristic scenario. Each country has its own business confidence index

and can be conducted by different agencies. The index can be region or sector

specific (manufacturing and services) or depending upon the size of the

organisation (large, medium and small).

In India, since 1991, the business confidence of Indian firms is gauged on

quarterly basis and the survey is done by NCAER (National Council of Applied

Economic Research). The name of the index is Business Expectations Survey. The

survey provides an assessment of the present conditions and short-term

prospects for India’s business environment based on responses from more than

500 companies in six metropolitan cities in India. The survey includes information

on firm characteristics, firm expectations of change in input and output costs,

their labour employment and wage situations, inventories, prospects for sales,

exports and imports and profits. After getting the replies from all the business

managers, the data is collated to form the final index using four parameters:

overall economic conditions, investment climate, financial position of the firm and

capacity utilisation.

Example : The 93rd round of Business Expectations Survey (BES) carried out in

June 2015 (reported month is July 2015) reveals that business sentiments have

not only continued to decline but are declining at a more rapid pace. The Business

confidence Index (BCI) fell by 11.9% over the previous quarter on a quarter-on-

quarter basis and by 15.1% on a year-on-year basis. All components of BCI

showed negative change between April and July 2015. The percentage of

respondents perceiving the ‘present investment climate is positive’ went down

sharply from 49.5% to 38.0% during the similar period. This component of the BCI

shows the sharpest decline.

Brand


Definition : A brand can be defined as a term, name symbol or design which helps

to distinguish the product of one seller from that of another. Brand gives identity

to the concerned product, service or entity.

Explanation : In the current scenario, the market place has undergone significant

change than that of the traditional market place. Today, the market can be

accessed both offline and online and such markets boasts of thousands of

products or services under the same category. Under such a scenario the

importance of brand is immense. To boost the sales of a product or service,

marketing is imperative and a brand helps in marketing, advertising and

promotion of the concerned product/service. A brand also helps to create a mass

market appeal and helps to instil trust, faith and loyalty within the mind of

customers. A brand helps to build positive sentiment among its target customers

and once it does so, the firm is said to have built up brand equity. Thus a brand is

similar to human being. It has a distinct personality, name, identity vision and

emotion. Brand is the end result of experiences that a company creates through

its employees, vendors, customers and a result of their experiences.

Example : The Brand of Mc Donald’s symbolises fast and timely service, consistent

food taste and food quality and consistent pricing.

Boom and Bust Cycle

Definition : Boom and Bust cycle is a process where an economy expands (higher

GDP growth and low unemployment) first and subsequently contracts or goes

into depression (falling GDP and rising unemployment). Period of economic

prosperity followed up by depressive scenario. This is a repeated continuous

process. This cycle is also witnessed in Capital Markets, commodities,

infrastructure and manufacturing sectors etc

Explanation : The boom and bust cycle (BMBT) is a continuous process and the

occurrence or frequency of the cycle (boom or bust) depends upon various

factors. It includes loose monetary policy, loose fiscal policy, boom and bust in

asset prices, bank lending and supply side shock.


If the central bank follows policy of easy money, where interest rates are low,

people will borrow and invest, which will lead to faster economic growth. The

catch here is that easy credit facility leads to excess investment or spending and

high inflation, which leads to bubble bust. It will soon be followed by slowdown

and depression.

Inflation-Indexed Bonds

Definition : Inflation-Indexed Bonds (IIBs) are debt market securities offered by

the Government and even some corporate houses to protect investor's savings

from inflation. Though many debt instruments offer assured returns and have

very low risks associated with them but when we take price rise into

consideration, the real rate of return from such debt instruments can be very low

or even negative. To address this concern, the Reserve Bank of India and the

Government of India introduced IIBs which promise positive real rate of return#.

# Real rate of returns: Nominal rate of return - Rate of inflation

Implication : IIBs ensure that inflation does not eat into an investor's savings at

the time of maturity. IIBs provides inflation protection to both principal and

interest payments. IIBs have high liquidity than other fixed income instruments as

they are tradable in the secondary market like other G-Secs. On the flip side,

investors do not get any special tax treatment by investing in such instruments.

Behavioural Economics

Definition : Behavioural economics can be defined as a branch of economics that

deals with the economic decision which people take in their daily practical life.

Such decisions are generally in conflict with that of the conventional economic

theory.

Explanation : Behaviourists who deal with behavioural economics try to explain as

to why people take irrational decisions and why their practical behaviour and


decisions are not on the lines of economic models. In other words behaviourists

endeavour to replace the traditional ideas of economic rationality by decision-

making models that are derived from the science of psychology. Psychologists

opine that people are often influenced by fear or regret and hence they are ready

to give up benefits just to avoid a marginal risk. Then there is a different class of

people who are easily influenced by external suggestions and they are willing to

take greater risks just to maintain their status. However, the traditional utility

theory suggests that people often make decisions after taking into account the big

picture.

Example : It needs to be noted that in Germany about 12% of the population

consent to be organ donors while the same percentage in Austria in 99%. This

wide gap is not due to difference in cultures. In Austria, 12% the consent to be

organ donors is presumed subject to the choice of opting out. In Germany on the

contrary the consent is not presumed and people need to opt in.

Bankruptcy

Definition : Bankruptcy can be defined as a legal proceeding in which a person or

business is unable to make the necessary payments to the concerned

creditor/creditors. The process generally starts when the debtor files a petition of

bankruptcy. Thereafter, all the debtor’s assets are evaluated which are then used

to repay the outstanding debt. When all the bankruptcy proceedings are

successfully completed, the debtor is relieved of all its debt obligations.

Explanation : The growth of an economy depends to some extent on the way the

bankrupts are treated. If the law punishes the bankrupts too severely, then the

upcoming entrepreneurs will be discouraged to adopt additional risks and convert

their ideas into successful forms of business. However, on the contrary if the

defaulting debtors are let off too easily, then this may lead to moral hazard in

which people may take more risk that they would normally take which may

adversely affect the growth prospects of the economy. The Indian Prime Minister

till recently has indicated that India would soon have a new bankruptcy code in

place which will help to quicken the pace of liquidation in stress cases. While the


Bankruptcy code was incorporated in the amended Companies Act in 2013, it

could not be implemented as there were some issues which is yet to be resolved.

Example : Lehman Brothers which was one of the largest financial corporations in

the world filed for bankruptcy in 2008 during the global financial crisis.

Backwardation

Definition : Backwardation occurs when price of a spot or near term contract is

higher than the price of future contracts or forward deliveries.

Explanation : Backwardation is a situation in the futures markets where a product

or contract’s current price is higher than a future price i.e. next month, 6 months

or even 1 year in the future. This is applied particularly to commodities. When a

market is experiencing backwardation, the contracts for future months are

decreasing in value relative to the current and most recent months. A market in

backwardation is a bearish sign because traders expect prices over the long term

to decrease.

Example : The oil market is in steep backwardation. The closing price on Tuesday,

July 13, 2015 for the September contract was 104.70. On the same day, the

closing price for the October contract was 104.01, November was 102.78,

December was 101.42, and January 2014 was 100.06.

Barriers to entry

Definition : Barriers to entry act as a preventive factor for new firms from

entering into a particular market or industry. Barriers to entry limit competition in

an industry. There can be various factors which act as entry barriers.

Explanation : Factors of barriers to entry are as follows:

1. Economies of scale- The existence of economies of scale acts as a barrier as

this leads to lower production costs than other competitors. With a lower


production cost, the firm is often in better position to determine the prices

and with a low price range, competitors might not be able to sustain.

2. Technology-Technological advancement helps a firm to be in better position

than its competitors and thus might prevent the start-ups to enter into the

industry.

3. Government Policy- Governments impose various controls, licensing

requirements and other regulations which prevent firms to enter into an

industry. Start-ups will find difficult to enter into a highly regulated industries.

4. Intellectual property- Patents of a products stop other firms legally in

entering and producing the product for a given period of time.

5. Product differentiation- Large firms may have existing customers loyal to the

products. Thus presence of established brands and customer services within a

market can act as entry barrier.

Example : Entering into mines industry is difficult for any start-ups as the industry

is highly regulated. Also, new technologies and economies of scale help the

existing players to maintain high profit margin and restricts the other players to

enter.

Dominant Firm

Definition : A dominant firm can be termed as the large firm which has a major

share of total industry sales (at least of 50%) and can set a price that helps to

maximize its own profit. Here the remaining smaller firms cater the rest of the

market demand.

Explanation : A dominant firm usually exists in an oligopolistic market structure

where there few firms cater the entire demand of the industry. Here, one of the

firms holds the maximum market share and sets the industry prices and the other

small firms supply the rest of the market demand. The dominant firm exists with

full information about market demand and it has the lower marginal cost than the

other small players.


Suppose that there is a firm- called A, which has a special production advantage

say, a superior technology that allows it to produce a product at lower costs than

can other firms. Thus, although the other firms in the industry can produce the

identical product but, the firm A can produce the same product at lower cost than

others and can determine the price and can act as a price maker. The rest of the

firms would be the price taker as they would take the price as set by the

dominant firm.

Example : Microsoft acts as the dominant computer operating systems company

in the industry and holds the maximum market share.

Deregulation

Definition : Deregulation can be termed as the process where government

control is being reduced or eliminated in a particular market segment or in an

economy. By implementing deregulation the government removes the barriers

and opens more space to private players in order to increase competition and

efficiency.

Explanation : Deregulation can be done partially when the government decides to

reduce part of its control over the system or it can be fully deregulated if the

government fully removes its control from the system.

There are several advantages and dis-advantages of deregulations.

Advantages-

Deregulation helps to raise competition among the players and this leads to

more efficient utilization of resources and lowers the cost of production and

reduces price for consumers.

Consumers get more choices in products and ability to switch if not satisfied

with the products of one producer. Consumer is king in deregulated

environment hence is rewarded with better customer service.

Government deregulation helps in reducing costs of bureaucracy as it

minimizes the intervention from the government.

Disadvantages-


1. Deregulation can create a natural monopoly and can create a private firm

with monopolistic power.

2. The monopolistic situation of business is disadvantageous especially for those

who cannot pay more for products because of their socioeconomic

conditions. In this case the deregulation will impact the ones at the bottom of

the economic ladder the most since they are without the protection of the

Government. The companies may put their businesses and profits first rather

than care for social and environmental responsibility.

Purchasing Power Parity

Definition : Purchasing Power Parity (PPP) helps to compare the income levels in

different countries and it measures the purchasing power of one currency against

that of the other currency after taking into consideration the exchange rate.

Explanation : Purchasing Power Parity can be used in comparing international

living standards between the countries as it defines the exact exchange rates for

comparing price and income in different currencies. The theory is based on the

idea that the ratio of price level and exchange rate between two countries must

be equivalent and thus the product should cost same in two countries.

PPP can be of two types- absolute and relative

Absolute PPP The concept is based on assumption that in the absence of

transactions costs, the same good will be sold at the same price across the

countries. Thus, the real price of a good must be same across the countries.

Absolute purchasing power parity maintains that the currency exchange rate

between two countries should be identical to the ratio of the two countries' price

levels.

Relative PPP relates the change in two countries' inflation rates to the change in

their exchange rates. Inflation reduces the real purchasing power of a nation's

currency. Thus, if a country has an annual inflation rate of 10%, that country's


currency will be able to purchase 10% less real goods compared to its

counterpart.

Example : Suppose PPP of India needs to be determined compared to the U.S.

Now let assume that the PPP of India compared to the U.S. is 50. It means that it

costs Rs. 50 in India to buy the basket of goods worth $1 in the U.S. Now let

assume that the rate of inflation in India is higher than that of the U.S. Since the

rate of inflation is higher in India, it will cost more than that determined in PPP in

India to buy the same basket of goods and services.

Basel 1 & 2

Definition : To regulate the finance and banking internationally, Basel Committee

on Bank Supervision was formed on 1988. The committee published a set of

minimum capital requirements for banks, which was called as Basel 1 with an

objective to minimise credit risk. Afterwards, market risk was also included. In

2004, the committee introduced refined and advanced version Basel 2, which also

covered the risk management (Market Risk and Operational Risk) and disclosure

requirements other than capital adequacy. It is known as three-pillar approach.

Explanation : Basel 2 is an improved version of Basel 1. It is because the first

version excludes other risks like operational risk and disclosure requirements.

Other than this, Basel 1 gives emphasis on book values and not market values.

Another is while assessing the credit risk, in Basel 1 there is no distinction

between debtors of different credit quality and rating. The rationale behind

releasing Basel 2 was to create standards and regulations on how much capital

financial institutions must keep aside.

Basel 1 recommended minimum of at least 8% of capital to risk weighted assets

(CRAR) and 4% Tier 1 CRAR. However, RBI has given higher guidelines of at least

9% CRAR and 6% Tier 1 CRAR.

CRAR or capital adequacy ratio is measure of a bank's capital and expressed in

percentage of a bank's risk weighted credit exposures.


Barbell Strategy

Definition : Traditionally concept of Barbell Strategy is applicable in debt market

investment wherein the portfolio is equally balanced between long-term and

short-term bonds. This means that the maturities of securities in a particular

portfolio are concentrated on two extreme ends. Typically the investor will not

invest in the intermediate duration bonds. By adopting Barbell Strategy, an

investor can take advantage of both low risk and high-risk (interest risk in this

case) assets and get better risk-adjusted returns in the process. This type of

investing will work in the scenario when interest rates are on the rise; and when

the short term maturity debts are rolled over they will receive a higher interest

rate.

Explanation : By virtue of Barbell Strategy, an investor purchases short and long-

term bonds only. By owning longer-term bonds, an investor locks in higher

interest rates, while short-term securities give him/her greater flexibility to invest

in other assets. If rate rises, the short-term bonds can be held to maturity and

then reinvested at the higher prevailing interest rates.

The traditionally this concept indicated investments in highest safety debt

investments in one-half of a portfolio and most risky ones in the other, at the

same time staying away from middle types. However variations have emerged for

the so-called barbells with a mix of entirely different assets classes viz index funds

and active funds, liquid and illiquid investments, or low-cost mutual funds and

high-cost hedge funds etc. There can be any combination of financial assets which

are counterbalanced on the investing bar. The barbell strategy is opposite of a

"bullet" strategy, in which the portfolio is concentrated in bonds of a particular

maturity or duration.

Annuitant

Definition : Annuitant refers to the person entitled as per a contract to receive

the income benefits from an annuity.


Explanation : Annuity refers to the contractual financial product sold by financial

institutions and insurance companies wherein an individual contributes fund for

accumulation and growth. Upon annuitization, a series of payments are made to

such individual in regular intervals at a later point of time. The concept of

annuitant is prevalent in insurance companies and other investment companies. If

an annuitant is an individual who has made the investment himself then he will

receive income benefits after a fixed period of time stated in the contract. The

term also includes any third person for whom the investment has been made,

who is entitled to get the benefits from the annuity. In an annuity contract, the

annuitant is legally the sole owner as well as the beneficiary.

Example : Mr. A purchased an annuity product from an XYZ Ltd. an investment

company. According to the terms of the contract, Mr. A is required to pay a fixed

sum of money at regular interval over a period of 10 years. Following the expiry of

the above mentioned period, he is entitled to receive a sum of Rs. 2,000 per

month for the rest of his life or 80 years whichever is earlier. In this case, Mr. A is

known as an annuitant.

Affinity Cards

Definition : Affinity cards can be defined as a type of credit card which is issued by

a bank in association with a charitable organization. Each time such a card is used

for a transaction, a certain percentage of the transaction will be donated to the

concerned charitable organization to be ploughed into their various projects.

These cards may be issued as part of social responsibility initiative of concerned

Banks.

Explanation : Affinity cards are generally offered in partnerships between banks

and non-profit organizations. However, the impact of such affinity cards depends

on the nature of the agreement between bank and the concerned non-profit

organization. Since such cards are issued in partnership, they have a beneficial

impact both on the concerned bank and the associated charitable organization.

However, such cards have their own set of limitations. Affinity cards normally

charge higher fees.


Example : ICICI Bank has “ICICI Bank Amity Humanity Foundation Gold Card”,

“ICICI Bank Concern India Foundation Credit Cards”, “ICICI Bank HelpAge India

Gold Credit Card”

Date post:	15-Apr-2017
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