Forex
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Hot Money:
Hot money is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts. These speculative capital flows are called "hot money" because they can move very quickly in and out of markets, potentially leading to market instability. Eg: The following simple example illustrates the phenomenon of hot money: In the beginning of 2011, the national average rate of one year certificate of deposit in the United States is 0.95%. In contrast, China's benchmark one year deposit rate is 3%. The Chinese currency (renminbi) is seriously undervalued against world's major trading currencies and therefore would appreciate against the US dollar in the coming years. Given this situation, if an investor in the US deposits his/her money in a Chinese bank, the investor would get a higher return than that in the situation in which he/she deposits money in a US bank. This makes China a prime target for hot money inflows. This is just an example for illustration. In reality, hot money takes many different forms of investment. Furthermore, the following vivid description of hot money help further illustrates this phenomenon: "one country or sector in the world economy experiences a financial crisis; capital flows out in a panic; investors seek more attractive destination for their money. In the next destination, capital inflows create a boom that is accompanied by rising indebtness, rising asset prices and booming consumption-for a time. But all too often, these capital inflows are followed by another crisis. Some commentators describe these patterns of capital flow as “hot money” that flows from one sector or country to the next and leaves behind a trail of destruction As mentioned above, capital in the following form could be considered hot money:
Short-term foreign portfolio investments, including investments in equities, bonds and financial derivatives Short-term foreign bank loans Foreign bank loans with short term investment horizon
The types of capital in the above categories share common characteristics: investment horizon is short; they can come in quickly and leave quickly.
MIBOR:
MIBOR - Mumbai Inter-Bank Offer Rate The Committee for the Development of the Debt Market that had studied and recommended the modalities for the development for a benchmark rate for the call money market. Accordingly, NSE had developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market on June 15, 1998. The success of the Overnight NSE MIBID MIBOR encouraged the Exchange to develop a benchmark rate for the term money market. NSE
launched the 14-day NSE MIBID MIBOR on November 10, 1998 and the longer term money market benchmark rates for 1 month and 3 months on December 1, 1998. Further, the exchange introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays with effect from June 6, 2008 in addition to existing overnight rate. The MIBID/MIBOR rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits. Mibor is calculated on the basis of data collected from the panel of 30 banks and primary dealers. The panel has a mix of public sector banks including State Bank of India, Central Bank of India and Indian Bank; private sector banks including Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd; foreign banks including Citibank NA and Deutsche Bank; and primary dealers including ICICI Securities Ltd and PNB Gilts Ltd. The rates are then calculated by a combination of two methods—polling and bootstrapping. In the polling method, like in the case of Libor, rates are taken from a few markets participants and the reference rates are arrived at. However, there is no guarantee that participants will give real and honest assessments as it is being unearthed in the case of Libor. Therefore, in India, polling was combined with bootstrapping. Bootstrapping is a statistical method that basically reduces the noise and identifies the outliers in the data collected from market participants. The combination is said to be better then applying the polling method alone. It is also expected to help against any attempt by the market participants to come together and influence rates.
Seigniorage:
Seigniorage is the difference between the value of money and the cost to produce and distribute it. The term can be applied in the following ways:
Seigniorage derived from specie—metal coins—is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area. Seigniorage derived from notes is more indirect, being the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.
Seigniorage is a convenient source of revenue for some governments. Eg: Scenario A: A person has one ounce of gold, trades it for a government-issued gold certificate (providing for redemption in one ounce of gold), keeps that certificate for a year, and then redeems it in gold. That person ends up with exactly one ounce of gold again. No seigniorage occurs. Scenario B: Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency. She keeps
the currency for one year, and then exchanges it all for an amount of gold at the new market value. If the value of the currency relative to gold has changed during the interim this second exchange may yield more or less than one ounce of gold. (Assume that the value or direct purchasing power of one ounce of gold remains constant through the year.) If the value of the currency relative to gold has decreased, then the person receives less than one ounce of gold. Seigniorage occurred. If the value of the currency relative to gold has increased, the redeemer receives more than one ounce of gold. Seigniorage did not occur. Seigniorages, therefore, is the positive return on issuing notes and coins, or “carry" on money in circulation. The opposite, "cost of carry", is not regarded as a form of seigniorage.
Hot money is a term that is most commonly used in financial markets to refer to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts. These speculative capital flows are called "hot money" because they can move very quickly in and out of markets, potentially leading to market instability. Eg: The following simple example illustrates the phenomenon of hot money: In the beginning of 2011, the national average rate of one year certificate of deposit in the United States is 0.95%. In contrast, China's benchmark one year deposit rate is 3%. The Chinese currency (renminbi) is seriously undervalued against world's major trading currencies and therefore would appreciate against the US dollar in the coming years. Given this situation, if an investor in the US deposits his/her money in a Chinese bank, the investor would get a higher return than that in the situation in which he/she deposits money in a US bank. This makes China a prime target for hot money inflows. This is just an example for illustration. In reality, hot money takes many different forms of investment. Furthermore, the following vivid description of hot money help further illustrates this phenomenon: "one country or sector in the world economy experiences a financial crisis; capital flows out in a panic; investors seek more attractive destination for their money. In the next destination, capital inflows create a boom that is accompanied by rising indebtness, rising asset prices and booming consumption-for a time. But all too often, these capital inflows are followed by another crisis. Some commentators describe these patterns of capital flow as “hot money” that flows from one sector or country to the next and leaves behind a trail of destruction As mentioned above, capital in the following form could be considered hot money:
Short-term foreign portfolio investments, including investments in equities, bonds and financial derivatives Short-term foreign bank loans Foreign bank loans with short term investment horizon
The types of capital in the above categories share common characteristics: investment horizon is short; they can come in quickly and leave quickly.
MIBOR:
MIBOR - Mumbai Inter-Bank Offer Rate The Committee for the Development of the Debt Market that had studied and recommended the modalities for the development for a benchmark rate for the call money market. Accordingly, NSE had developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market on June 15, 1998. The success of the Overnight NSE MIBID MIBOR encouraged the Exchange to develop a benchmark rate for the term money market. NSE
launched the 14-day NSE MIBID MIBOR on November 10, 1998 and the longer term money market benchmark rates for 1 month and 3 months on December 1, 1998. Further, the exchange introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays with effect from June 6, 2008 in addition to existing overnight rate. The MIBID/MIBOR rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits. Mibor is calculated on the basis of data collected from the panel of 30 banks and primary dealers. The panel has a mix of public sector banks including State Bank of India, Central Bank of India and Indian Bank; private sector banks including Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd; foreign banks including Citibank NA and Deutsche Bank; and primary dealers including ICICI Securities Ltd and PNB Gilts Ltd. The rates are then calculated by a combination of two methods—polling and bootstrapping. In the polling method, like in the case of Libor, rates are taken from a few markets participants and the reference rates are arrived at. However, there is no guarantee that participants will give real and honest assessments as it is being unearthed in the case of Libor. Therefore, in India, polling was combined with bootstrapping. Bootstrapping is a statistical method that basically reduces the noise and identifies the outliers in the data collected from market participants. The combination is said to be better then applying the polling method alone. It is also expected to help against any attempt by the market participants to come together and influence rates.
Seigniorage:
Seigniorage is the difference between the value of money and the cost to produce and distribute it. The term can be applied in the following ways:
Seigniorage derived from specie—metal coins—is a tax, added to the total price of a coin (metal content and production costs), that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area. Seigniorage derived from notes is more indirect, being the difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.
Seigniorage is a convenient source of revenue for some governments. Eg: Scenario A: A person has one ounce of gold, trades it for a government-issued gold certificate (providing for redemption in one ounce of gold), keeps that certificate for a year, and then redeems it in gold. That person ends up with exactly one ounce of gold again. No seigniorage occurs. Scenario B: Instead of issuing gold certificates, a government converts gold into currency at the market rate by printing paper notes. A person exchanges one ounce of gold for its value in currency. She keeps
the currency for one year, and then exchanges it all for an amount of gold at the new market value. If the value of the currency relative to gold has changed during the interim this second exchange may yield more or less than one ounce of gold. (Assume that the value or direct purchasing power of one ounce of gold remains constant through the year.) If the value of the currency relative to gold has decreased, then the person receives less than one ounce of gold. Seigniorage occurred. If the value of the currency relative to gold has increased, the redeemer receives more than one ounce of gold. Seigniorage did not occur. Seigniorages, therefore, is the positive return on issuing notes and coins, or “carry" on money in circulation. The opposite, "cost of carry", is not regarded as a form of seigniorage.
