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when the chemical industry and electrical industry developed they involved elements of both heavy industry and light industry which was soon also true for the automotive industry and the aircraft industry heavy industry shipbuilding became the norm as steel replaced wood in modern shipbuilding large systems are often characteristic of heavy industry such as the construction of skyscrapers and large dams during the post world war ii era and the manufacture deployment of large rockets and giant wind turbines through the 21st century | another trait of heavy industry is that it most often sells its goods to other industrial customers rather than to the end consumer heavy industries tend to be a part of the supply chain of other products as a result their stocks will often rally at the beginning of an economic upturn and are often the first to benefit from an increase in demand heavy industry in asiathe economies of many east asian countries are based on heavy industry 1 among such japanese and korean firms many are manufacturers of aerospace products and defense contractors examples include japan s fuji heavy industries and korea s hyundai rotem a joint project of hyundai heavy industries and daewoo heavy industries in the 20th century asian communist states often focused on heavy industry as an area for large investments in their planned economies this decision was motivated by fears of failing to maintain military parity with foreign powers for example the soviet union s manic industrialization in the 1930s with heavy industry as the favored emphasis sought to bring its ability to produce trucks tanks artillery aircraft and warships up to a level that would make the country a great power 2 | |
what is the heckscher ohlin model | the heckscher ohlin model is an economic theory proposing that countries export what they can most efficiently and plentifully produce it s also referred to as the h o model or 2x2x2 model it s used to evaluate trade and the equilibrium of trade between two countries that have varying specialties and natural resources the model emphasizes the export of goods that require factors of production a country has in abundance it also emphasizes the import of goods that a nation can t produce as efficiently it takes the position that countries should ideally export materials and resources that they have an excess of while proportionately importing those resources they need the basics of the heckscher ohlin modelthe primary work behind the heckscher ohlin model was a 1919 swedish paper written by eli heckscher at the stockholm school of economics his student bertil ohlin added to it in 1933 economist paul samuelson expanded the original model through articles written in 1948 1949 and 1953 some refer to it as the heckscher ohlin samuelson model for this reason 1the heckscher ohlin model explains mathematically how a country should operate and trade when resources are imbalanced throughout the world it pinpoints a preferred balance between two countries each with its resources the model isn t limited to tradable commodities it also incorporates other production factors such as labor the costs of labor vary from one nation to another so countries with cheap labor forces should focus primarily on producing labor intensive goods according to the model 2evidence supporting the heckscher ohlin modelthe heckscher ohlin model appears reasonable but most economists have had difficulty finding evidence to support it a variety of other models have been used to explain why industrialized and developed countries traditionally lean toward trading with each other and rely less heavily on trade with developing markets the linder hypothesis outlines and explains this theory it states that countries with similar incomes require similarly valued products and that this leads them to trade with each other 3real world example of the heckscher ohlin modelcertain countries have extensive oil reserves but they have very little iron ore other countries can easily access and store precious metals but they have little in the way of agriculture the netherlands exported almost 696 million in u s dollars in 2021 compared to imports that year of approximately 623 million its top import export partner was germany 4 importing on a close to equal basis allowed it to more efficiently and economically manufacture and provide its exports | |
what are the top traded commodities | crude oil takes top honors as the most traded commodity around the globe it s used in automotive fuels lubricants and heating oils gold silver and natural gas follow coffee soybeans and cotton bring up the rear 5 | |
what is the linder hypothesis | the linder hypothesis is a relatively unsupported theory that countries with similar incomes per capita should focus on trading with each other 6 | |
what is the cost of labor in the u s | the cost of labor is the total compensation paid to and for employees including wages salaries benefits and payroll taxes it s measured by comparing costs incurred for various types of personnel from quarter to quarter or annually it increased by 1 2 for civilian workers in the first quarter of 2024 and by 4 2 over the previous 12 months as of march 2024 7the bottom linethe heckscher ohlin model emphasizes the benefits of international trade and the global benefits to everyone when each country puts the most effort into exporting resources that are domestically naturally abundant all countries benefit when they import the resources they naturally lack a nation can take advantage of elastic demand when it doesn t have to rely solely on internal markets the cost of labor increases and marginal productivity declines as more countries and emerging markets develop trading internationally allows countries to adjust to capital intensive goods production that wouldn t be possible if each country only sold goods internally | |
what is a hedge | a hedge is an investment that is selected to reduce the potential for loss in other investments because its price tends to move in the opposite direction this strategy works as a kind of insurance policy offsetting any steep losses in other investments the term hedging can be used to describe diversifying a portfolio by buying shares in a conservative bond fund to offset potential losses in more volatile stock funds in the financial world where traders constantly buy and sell assets some of them highly risky hedging typically involves trading in derivatives which can be effective hedges because their relationship with their underlying assets is clearly defined investopedia madelyn goodnight | |
how a hedge works | using a hedge is a bit like taking out an insurance policy if you own a home in a flood prone area you can protect it from the risk of flooding hedge it in other words by taking out flood insurance you cannot eliminate the risk of a flood but you mitigate the financial losses you could incur similarly if you invest in a hot technology company with the firm belief that its business will thrive over the next quarters you might also invest in a solid consumer staple stock just in case you re mistaken the downside to a hedgethere is a risk reward tradeoff inherent in hedging while it reduces potential risk it also chips away at potential gains hedging isn t free in the case of the flood insurance policy example the monthly payments add up and if the flood never comes the policyholder gets nothing still most people would choose to limit their losses in the world of professional investing hedging works in the same way investors and money managers use hedging practices to reduce and control their exposure to risks they use various tools for the purpose many of them based on derivatives a perfect hedge eliminates all risk in a position or portfolio in other words the hedge is 100 inversely correlated to the vulnerable asset this is more an ideal than a reality and even the hypothetical perfect hedge is not without cost hedging with derivativesderivatives are financial contracts whose price depends on the value of some underlying security futures forwards and options contracts are common types of derivatives contracts the effectiveness of a derivative hedge is expressed in terms of its delta sometimes called the hedge ratio delta is the amount that the price of a derivative moves per 1 movement in the price of the underlying asset the specific hedging strategy as well as the pricing of hedging instruments depends largely upon the downside risk of the underlying security against which the investor wants to hedge generally the greater the downside risk the greater the cost of the hedge downside risk tends to increase with higher levels of volatility and over time an option that expires after a longer period and is linked to a volatile security will be more expensive as a means of hedging in general the higher the strike price the more expensive the put option will be but the more price protection it will offer as well these variables can be adjusted to create a less expensive option that offers less protection or a more expensive one that provides greater protection the hedge fund gets its name from the wide latitude given a hedge fund manager to trade in alternative investments and use risky strategies such as leverage borrowing to invest to achieve results example of hedging with a put optiona common way of hedging in the investment world is through put options puts give the holder the right but not the obligation to sell the underlying security at a pre set price on or before the date it expires for example if morty buys 100 shares of stock plc at 10 per share he might hedge his investment by buying a put option with a strike price of 8 expiring in one year this option gives morty the right to sell 100 shares of that stock for 8 anytime in the next year let s assume he pays 1 for the option or 100 in premium if the stock is trading at 12 one year later morty will not exercise the option and will be out 100 he s unlikely to fret though because his unrealized gain is 100 100 including the price of the put if the stock is trading at 0 on the other hand morty will exercise the option and sell his shares for 8 for a loss of 300 300 including the price of the put without the option he stood to lose his entire investment hedging through diversificationstrategically diversifying a portfolio to reduce certain risks can also be considered a hedge for example rachel might invest in a luxury goods company with rising margins she might worry though that a recession could wipe out the market for conspicuous consumption one way to combat that would be to buy tobacco stocks or utilities which tend to weather recessions well and pay hefty dividends this strategy has its tradeoffs if wages are high and jobs are plentiful the luxury goods maker might thrive but few investors would be attracted to boring countercyclical stocks which might fall as capital flows to more exciting places it also has its risks there is no guarantee that the luxury goods stock and the hedge will move in opposite directions they could both drop due to one catastrophic event as happened during the financial crisis spread hedgingfor investors in index funds moderate price declines are quite common and highly unpredictable investors focusing on this area may be more concerned with moderate declines than severe ones in these cases a bear put spread is a common hedging strategy in this type of spread the index investor buys a put that has a higher strike price next she sells a put with a lower strike price but the same expiration date depending on how the index behaves the investor thus has a degree of price protection equal to the difference between the two strike prices minus the cost while this is likely to be a moderate amount of protection it is often sufficient to cover a brief downturn in the index hedging and the everyday investormost individual investors don t trade derivative contracts investors with a long term strategy such as those saving for retirement can ignore the day to day fluctuations of the markets for investors who fall into the buy and hold category there may seem to be little or no reason to learn about hedging still because large companies and investment funds tend to engage in hedging practices regularly and because these investors might follow or even be involved with these larger financial entities it s useful to understand what hedging entails to comprehend the actions of these larger players | |
what is hedging against risk | hedging is a strategy to limit investing risks investors hedge an investment by making a trade in another that is likely to move in the opposite direction | |
what is an example of hedging | hedging is commonly used to offset potential losses in currency trading a foreign currency trader who is speculating on the movements of a currency might open a directly opposing position to limit losses from price fluctuations thus the trader retains some upside potential no matter what happens | |
is hedging an imperfect science | yes a perfect hedge would eliminate all risk in a position or portfolio in other words the hedge is 100 inversely correlated to the vulnerable asset this is purely hypothetical but even the hypothetical perfect hedge has a cost that subtracts from its gain the bottom linehedging is an important financial concept that allows investors and traders to minimize various risk exposures a hedge is effectively an offsetting or opposite position taken that will gain or lose in value as the primary position loses or gains value a hedge can be thought of as a sort of insurance policy on an investment or a portfolio these offsetting positions can be achieved using closely related assets or through diversification among professional traders the most common and effective hedge uses derivatives such as futures forward or options contracts | |
what is hedge accounting | hedge accounting is a method of accounting in which entries to adjust the fair value of a security and its opposing hedge are treated as one hedge accounting attempts to reduce the volatility created by the repeated adjustment to a financial instrument s value known as fair value accounting or mark to market this volatility is reduced by combining the instrument and the hedge as one entry which offsets the opposing s movements 1understanding hedge accountinga hedge fund is used to lower the risk of overall losses by assuming an offsetting position in relation to a particular security the purpose of the hedge fund account is not necessarily to generate profit but instead to lessen the impact of associated losses especially those attributed to interest rate exchange rate or commodity risk this helps lower the perceived volatility associated with an investment by compensating for changes that are not purely reflective of an investment s performance the point of hedging a position is to reduce the volatility of the overall portfolio hedge accounting has the same effect except that it is used on financial statements for example when accounting for complex financial instruments adjusting the value of the instrument to fair value creates large swings in profit and loss hedge accounting treats the changes in market value of the reciprocal hedge and the original security as one entry so that large swings are reduced hedge accounting is used in corporate bookkeeping as it relates to derivatives in order to lessen overall risk derivatives are often used to offset the risks associated with a security hedge accounting uses the information from the security and the associated derivative as a single item lessening the appearance of volatility when compared to reporting each individually recording hedge accountinghedge accounting is an alternative to more traditional accounting methods for recording gains and losses when treating the items individually such as a security and its associated hedge fund the gains or losses of each would be displayed individually since the purpose of the hedge fund is to offset the risks associated with the security hedge accounting treats the two line items as one instead of listing one transaction of a gain and one of a loss the two are examined to determine if there was an overall gain or loss between them and just the net amount is recorded this approach can make financial statements simpler as they will have fewer line items but some potential for deception exists since the details are not recorded individually | |
what are the three different hedge accounting models | financial accounting standards board fasb accounting standards codification asc topic 815 addresses derivatives and hedging there are three categories of hedge accounting described in asc 815 | |
what is a fair value hedge | a fair value hedge is used to hedge against a company s exposure to volatility and changes in the fair value of an asset or liability in order to qualify for hedge accounting the potential changes in the asset or liability s fair value must have the potential to affect the company s reported earnings examples of items that may qualify for fair value hedging include inventory and assets or liabilities denominated in a foreign currency 2 | |
what is a cash flow hedge | a cash flow hedge is used to reduce the exposure to volatility of cash flows from an existing asset or liability or a forecasted transaction in order to qualify for hedge accounting the potential changes in cash flows from the asset liability or future transaction must have the potential to affect the company s reported earnings examples of items that may qualify for cash flow hedging include variable interest rate assets or liabilities assets or liabilities denominated in a foreign currency forecasted purchases or sales and forecasted debt issuances 2 | |
what is a net investment hedge | a net investment hedge is used to hedge a company s foreign currency exposure and reduce the potential reported earnings risk that may occur upon the future disposition of a net investment in a foreign operation 2the bottom linefasb s changes in the updated asc 815 made the use of hedge accounting easier for companies to adopt but that doesn t mean it s easy even with the changes hedge accounting can still be complex and some companies may not use it because it s perceived as more difficult than other accounting topics according to gautam goswami cpa national assurance partner at bdo 1 | |
what is a hedge clause | a hedge clause is included in a research report to attempt to absolve the writer of any responsibility for the accuracy of the information included in the report or publication the hedge clause indemnifies the author s against responsibility for any errors omissions or oversights contained within the document hedge clauses can be found in analyst reports company press releases and most investing websites examples of a hedge clause are a disclaimer and a safe harbor notice understanding hedge clauseshedge clauses are meant to protect those who communicate but do not have a role in the recording or preparation of an organization s financial information though hedge clauses are frequently overlooked investors are advised to review them in order to better judge and interpret the material in a publication investors will find hedge clauses in nearly every financial report published today and even though they are often glossed over they are very important for investors to read and understand an example is the safe harbor provision found in most company press releases potential conflicts of interest from for example a stock analyst writing a recommendation for one s own holdings must also be included in the hedge clause for that report typical hedge clause structurea typical hedge clause in an investment advisory contract or hedge fund limited partnership limited liability company agreement is structured as an exculpation of the adviser from liability and or as indemnification of the adviser by the advisory client unless the adviser has been grossly negligent or has engaged in reckless or willful misconduct illegal acts or acts outside the scope of its authority often hedge clauses are followed by non waiver disclosure that explains that the client may have certain legal rights generally arising under federal and state securities laws notwithstanding the hedge clauses that have not been waived securities and exchange commission position on hedge clausesthe u s securities and exchange commission sec has stated that sections 206 1 and 206 2 of the advisers act make it unlawful for any investment adviser to employ any device scheme or artifice to defraud or to engage in any transaction practice or course of business that operates as fraud or deceit on clients or prospective clients 1those antifraud provisions may be violated by the use of a hedge clause or other exculpatory provision in an investment advisory agreement which is likely to lead an investment advisory client to believe that they have waived non waivable rights of action against the adviser the sec has previously taken the position that hedge clauses that purport to limit an investment adviser s liability to acts involving gross negligence or willful malfeasance are likely to mislead a client who is unsophisticated in the law into believing that they have waived non waivable rights even if the hedge clause explicitly provides that rights under federal or state law cannot be relinquished 23 | |
what is a hedge fund | a hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers these managers use a wide range of strategies including leverage borrowed money and the trading of non traditional assets to earn above average investment returns a hedge fund investment is often considered a risky alternative investment choice and usually requires a high minimum investment or net worth hedge funds typically target wealthy investors investopedia julie bangunderstanding hedge fundsthe term hedge fund refers to an investment instrument with pooled funds that is managed to outperform average market returns the fund manager often hedges the fund s positions to protect them from market risk they do so by investing a portion of the fund s assets in securities whose prices move in the opposite direction of the fund s core holdings theoretically should the prices of the core holdings move down the prices of the securities acting as a hedge should move up as a result the hedge can offset any losses in the core holdings for example a hedge fund that focuses on a cyclical sector such as travel may invest a portion of its assets in a non cyclical sector such as energy aiming to use the positive returns of the non cyclical stocks to offset any losses in cyclical stocks hedge funds use risky strategies leverage and derivative securities such as options and futures therefore an investor in a hedge fund is commonly regarded as an accredited investor this means that they meet a required minimum level of income or assets typical investors are institutional investors such as pension funds and insurance companies and wealthy individuals investments in hedge funds are considered illiquid as funds often require investors to keep their money in the fund for at least one year a time known as the lock up period withdrawals may also only happen at certain intervals such as quarterly or bi annually 1types of hedge fundsfour common types of hedge funds are the appeal of many hedge funds lies in the reputations of their managers which stand out in the closed world of hedge fund investing common hedge fund strategieshedge fund strategies cover a broad range of risk tolerance and investment philosophies they involve a large selection of investments including debt and equity securities commodities currencies derivatives and real estate common hedge fund strategies are classified according to the investment style of the fund s manager and include equity fixed income and event driven investment goals examples of hedge fundsthe most notable hedge funds based on assets under management aum include hedge fund compensationaustralian investor alfred winslow jones is credited with launching the first hedge fund in 1949 through his company a w jones co raising 100 000 he designed a fund that aimed to minimize the risk in long term stock investing by short selling now referred to as the long short equities model in 1952 jones converted his fund to a limited partnership added a 20 incentive fee as compensation for the managing partner and became the first money manager to combine short selling the use of leverage and a compensation system based on performance 3today hedge funds employ a standard 2 and 20 fee system which refers to a 2 management fee and a 20 performance fee 1the management fee is based on the net asset value of each investor s shares so an investment of 1 million garners a 20 000 management fee that year to cover the operations of the hedge and compensate the fund manager the performance fee is commonly 20 of profits if an investment of 1 million increases to 1 2 million in one year 40 000 is the fee owed to the fund hedge fund vs mutual fundhedge funds are not as strictly regulated by the securities and exchange commission sec as mutual funds are 4mutual funds are a practical cost efficient way to build a diversified portfolio of stocks bonds or short term investments they are available to the general public and average investor hedge funds normally will only accept money from accredited investors who include individuals with an annual income that exceeds 200 000 or a net worth exceeding 1 million excluding their primary residence these investors are considered suitable to handle the potential risks that hedge funds are permitted to take 5a hedge fund can invest in land real estate stocks derivatives and currencies while mutual funds use stocks or bonds as their instruments for long term investment strategies unlike mutual funds where an investor can elect to sell shares at any time hedge funds typically limit opportunities to redeem shares and often impose a locked period of one year before shares can be cashed in hedge funds employ the 2 management fee and 20 performance fee structure in 2022 the average expense ratio across all mutual funds and exchange traded funds was 0 37 6read about investopedia s 10 rules of investing by picking up a copy of our special issue print edition | |
what to consider before investing | as investors conduct research to identify hedge funds that meet their investment goals they often consider the fund or firm s size the track record and longevity of the fund the minimum investment required to participate and the redemption terms of the fund hedge funds operate in many countries including the u s united kingdom hong kong canada and france according to the sec investors should also do the following when deciding whether or not to invest in a hedge fund | |
what tools do investors use to compare the performance of hedge funds | investors look at the annualized rate of return to compare funds and to reveal funds with high expected returns to establish guidelines for a specific strategy an investor can use an analytical software package such as morningstar to identify a universe of funds using similar strategies | |
how do hedge funds compare to other investments | hedge funds mutual funds and exchange traded funds etfs all pool money contributed by many investors and attempt to earn a profit for themselves and their clients hedge funds are actively managed by professional managers who buy and sell certain investments with the stated goal of exceeding the returns of the markets or some sector or index of the markets they take the greatest risks while trying to achieve these returns in addition hedge funds are more loosely regulated than competing investments and they can invest in options and derivatives as well as esoteric investments that mutual funds cannot invest in | |
why do people invest in hedge funds | a wealthy individual who can afford to diversify into a hedge fund might be attracted to the high performance reputation of its manager the specific assets in which the fund is invested or the unique strategy that it employs the bottom linehedge fund investing is considered a risky alternative investment choice and requires that investors can make a large minimum investment or have a high net worth hedge fund strategies involve investing in debt and equity securities commodities currencies derivatives and real estate hedge funds are loosely regulated by the sec and earn money from the 2 management fee and 20 performance fee structure | |
what is a hedge fund manager | a hedge fund manager is an individual or financial firm that manages and makes investment decisions and oversees the operations of a hedge fund managing a hedge fund can be an attractive career option because of its high earnings potential to be successful a hedge fund manager must consider how to create and maintain a competitive advantage a clearly defined investment strategy adequate capitalization a marketing and sales plan and a risk management strategy responsibilities of a hedge fund managerhedge fund management firms are often owned by the managers in charge of a hedge fund portfolio this means that they are entitled to a large percentage of the profits that the hedge fund makes | |
what sets hedge fund managers apart from other types of fund managers is the fact that the personal worth and funds of hedge fund managers are usually tied directly to the fund itself | the duties of a hedge fund manager involve top hedge fund managers hold some of the most well paid positions in any industry far outpacing ceos of major companies in fact some of the highest grossing managers make close to 4 billion a year 1this extraordinary compensation potential requires hedge fund managers to stay competitive to consistently create winning investment strategies and to make advantageous trade choices note that many hedge fund managers make much less than the top paid managers in some cases because their funds generate lower profits individuals wishing to invest in hedge funds must meet income and net worth requirements hedge funds can be considered high risk because they pursue aggressive investment strategies and are less regulated than many other types of investments hedge fund strategieshedge fund managers can use multiple strategies to maximize returns for their firms and clients 1 one popular strategy is using something called global macro investing the idea is to invest in tandem with a large share of sizable position in markets that are dealing with predicting global macroeconomic trends this type of strategy gives hedge fund managers the necessary flexibility they need but it is heavily dependent on excellent timing 2 another popular tactic that has made multiple hedge fund managers billionaires is an event driven strategy managers look for attractive opportunities to capitalize on a corporate environment examples of this include mergers and acquisitions bankruptcies and shareholder buyback initiatives managers using this strategy seek to capitalize on any market inconsistencies it s similar to using a value investing approach hedge fund managers often go this route because of the vast resources they have behind them according to an analysis by veteran business to business publisher institutional investor despite the tough year for the markets 2022 was a very good year for multistrategy macro trend following and fixed income hedge fund managers 1hedge fund manager compensationtwo and twenty or 2 and 20 is a typical fee arrangement for hedge fund managers that is standard in the hedge fund industry it is also common in venture capital and private equity hedge fund management companies typically charge clients both a management and a performance fee two means 2 of assets under management aum and refers to the annual management fee charged by the hedge fund for managing assets twenty refers to the standard performance or incentive fee of 20 of the profits made by the fund above a certain predefined benchmark while this lucrative fee arrangement has resulted in many hedge fund managers becoming extremely wealthy in recent years the fee structure has come under fire from investors and politicians for varying reasons some hedge fund managers also have to contend with a high watermark that is applicable to their performance fee a high watermark policy specifies that the fund manager will only be paid a percentage of the profits if the fund s net value exceeds its previous highest value this precludes the fund manager being paid large sums for poor performance and ensures that any losses must be made up before performance fees are paid out in 2022 the 25 highest paid hedge fund managers made 21 5 billion an average of approximately 860 million for each the hedge fund manager who earned the most ken griffin banked 4 1 billion 1the median amount earned by hedge fund managers in 2022 was 570 million 1 | |
is a hedge fund manager different from a portfolio manager | broadly speaking both manage a portfolio of investments but a hedge fund manager is responsible for the affairs in their entirety of a hedge fund and may be a limited partner in the fund a portfolio manager is focused on making and managing investments in a portfolio which could relate to the investments of an individual investor or a mutual fund plus the portfolio manager typically isn t as geared toward the high risk strategies and investments that a hedge fund manager is | |
what is a hedge fund | it s a limited partnership of high net worth accredited investors that seeks above average returns from actively managed investments and mandates non traditional high risk positions to achieve them | |
what education does a hedge fund manager need | normally hedge fund managers need at minimum a college degree in a relevant area of study such as finance as well as work experience in the investment field undergraduate experience for example as an intern at a financial firm is beneficial an advanced degree e g a master of finance can also be an advantage for such job seekers they ll require a business license to operate and earning credentials are also valuable 2the bottom linea hedge fund manager is an individual or financial firm that is responsible for a hedge fund and for achieving the substantial profitability mandated by the partnership of investors behind it some hedge fund managers earn enormous amounts of money yearly from many hundreds of millions to over several billion dollars but it appears that most settle for far less 3 | |
what is the hedge ratio | the hedge ratio compares the value of a position protected through the use of a hedge with the size of the entire position itself a hedge ratio may also compare the value of futures contracts purchased or sold with the value of the cash commodity being hedged futures contracts are essentially investment vehicles that let the investor lock in a price for a physical asset at some point in the future the hedge ratio is the hedged position divided by the total position | |
how the hedge ratio works | imagine you are holding 10 000 in foreign equity which exposes you to currency risk you could enter into a hedge to protect against losses in this position which can be constructed through a variety of positions to take an offsetting position to the foreign equity investment if you hedge 5 000 worth of the equity with a currency position your hedge ratio is 0 5 5 000 10 000 this means that 50 of your foreign equity investment is sheltered from currency risk types of hedge ratiosthe minimum variance hedge ratio is important when cross hedging which aims to minimize the variance of the position s value the minimum variance hedge ratio or optimal hedge ratio is an important factor in determining the optimal number of futures contracts to purchase to hedge a position it is calculated as the product of the correlation coefficient between the changes in the spot and futures prices and the ratio of the standard deviation of the changes in the spot price to the standard deviation of the futures price after calculating the optimal hedge ratio the optimal number of contracts needed to hedge a position is calculated by dividing the product of the optimal hedge ratio and the units of the position being hedged by the size of one futures contract example of the hedge ratioassume that an airline company fears that the price of jet fuel will rise after the crude oil market has been trading at depressed levels the airline company expects to purchase 15 million gallons of jet fuel over the next year and wishes to hedge its purchase price assume that the correlation between crude oil futures and the spot price of jet fuel is 0 95 which is a high degree of correlation further assume that the standard deviation of crude oil futures and spot jet fuel price is 6 and 3 respectively therefore the minimum variance hedge ratio is 0 475 or 0 95 3 6 the new york mercantile exchange nymex west texas intermediate wti crude oil futures contract has a contract size of 1 000 barrels or 42 000 gallons 1 the optimal number of contracts is calculated to be 170 contracts or 0 475 15 million 42 000 therefore the airline company would purchase 170 nymex wti crude oil futures contracts | |
how do i calculate the hedge ratio | divide the hedged position by the total position and the quotient is the hedge ratio | |
why is a minimum variance hedge ratio important | the minimum variance hedge ratio helps determine the optimal number of options contracts needed to hedge a position the ratio is important in cross hedging which aims to minimize the variance of a position s value | |
is there another name for the minimum variance hedge ratio | yes the minimum variance hedge ratio is also known as the optimal hedge ratio either way you name it it is an important factor in determining the optimal number of futures contracts to purchase to hedge a position the bottom linethe hedge ratio compares the amount of a hedged position with the entire position it may also compare the value of futures contracts purchased or sold with the value of the cash commodity being hedged | |
what is hedged tender | a hedged tender is an investment strategy where an investor sells short a portion of shares they own in anticipation that not all shares tendered will be accepted this strategy is used to protect against the risk of loss in case the tender offer does not go through the offer locks in the shareholder s profit no matter the outcome of the tender offer | |
how a hedged tender works | a hedged tender is a way to counteract the risk that the offering company refuses some or all of an investor s shares that are submitted as part of a tender offer a tender offer is a proposal from one investor or company to purchase a set number of shares of another company s stock at a price that is higher than the current market price hedged tender as insurancea hedged tender strategy or any type of hedging is a form of insurance hedging in a business context or in a portfolio is about decreasing or transferring risk consider that a corporation may want to hedge against currency risk so it decides to build a factory in another country that it exports its product to investors hedge because they want to protect their assets against a negative market event that causes their assets to depreciate hedging may imply a cautious approach but many of the most aggressive investors use hedging strategies to increase their opportunities for positive returns by mitigating risk in one part of a portfolio an investor can often take on more risk elsewhere increasing their absolute returns while putting less capital at risk in each individual investment another way to look at it is hedging against investment risk means strategically using market instruments to offset the risk of any adverse price movements in other words investors hedge one investment by making another example of a hedged tenderan example would be if an investor has 5 000 shares of company abc an acquiring company then submits a tender offer of 100 per share for 50 of the target company when the shares are worth 80 the investor then anticipates that in a tender of all 5 000 shares the bidder would accept only 2 500 pro rata so the investor determines that the best strategy would be to sell 2 500 shares short after the announcement and when the price of the stock approaches 100 company abc then buys only 2 500 of the original shares at 100 in the end the investor has sold all shares at 100 even as the price of the stock drops following news of the potential transaction | |
what is a hedging transaction | a hedging transaction is a tactical action that an investor takes with the intent of reducing the risk of losing money or experiencing a shortfall while executing their investment strategy understanding hedging transactionsa hedging transaction usually involves derivatives such as options or futures contracts but it can be done with inversely correlated assets as well and can take many different forms while they are generally used to limit the losses that a position faces if the initial investing thesis is incorrect they can also be used to lock in a specific amount of profit as such they are a common tool for businesses as well as portfolio managers looking to lower their overall portfolio risk hedging transactions can be related to an investment or they can be related to regular business transactions but the hedge itself is usually market based an investment based hedging transaction can use derivatives such as put options futures or forward contracts these derivatives function very similarly to the dynamics of an insurance policy those who purchase a derivative for the purpose of hedging pay a premium if something goes wrong with the strategic investment the insurance policy a tactical hedge pays off but if nothing goes wrong the hedge is a sunk cost these costs are often much lower than the potential losses facing these investors if their investment goes awry and if the investment pays off as hoped these sunk costs are often considered acceptable by the investor one problem with thinking of hedging transactions strictly as insurance is that unlike insurance there exists a third possibility often unaccounted for by inexperienced investors namely that the investment rises in value but by only a small amount in that scenario the investor may find that the small gain has become a loss when the cost of the hedging transaction is taken into account investors can also use the purchase of inversely correlated assets to act as a hedge against overall portfolio risks presented from one asset or the other for example investors look for stocks that have a low correlation with the s p 500 to get some level of protection from dips in the value of the widely held stocks that make up the index these types of hedging transactions are often referred to as diversification as they do not offer the direct protection that derivatives do hedging transactions in global businesshedging transactions are critical for the global economy for example if domestic company a is selling goods to foreign company b the first transaction is the sale let s say the sale is going to be settled in the currency of company b if company a is worried about currency fluctuations affecting the value of the contract when the money actually comes in and is converted to company a s domestic currency they can enter a hedging transaction through the foreign exchange market taking up offsetting positions that minimize the currency risk it is worth noting that hedging transactions do not necessarily cover the total value of the sale or asset position while a perfect hedge is mathematically possible they are almost never employed because such a transaction proves more costly than desired this can be for one of two reasons | |
what is hedonic pricing | hedonic pricing is a model that identifies price factors according to the premise that price is determined both by internal characteristics of the good being sold and external factors affecting it a hedonic pricing model is often used to estimate quantitative values for environmental or ecosystem services that directly affect market prices for homes this method of valuation can require a strong degree of statistical expertise and model specification following a period of data collection understanding hedonic pricingthe most common example of the hedonic pricing method is in the real estate market wherein the price of a building or piece of land is determined by the characteristics of both the property itself i e internal factors like its size appearance features like solar panels or state of the art faucet fixtures and condition and its surrounding environment i e external factors such as if the neighborhood has a high crime rate and or is accessible to schools and a downtown area the level of water and air pollution or the value of other homes close by the hedonic pricing model is used to estimate the extent to which each factor affects the market price of the property when running this type of model if non environmental factors are controlled for held steady any remaining discrepancies in price will represent differences in the good s external surroundings with regard to valuing properties a hedonic pricing model is relatively straightforward as it relies on actual market prices and comprehensive available data sets hedonic pricing is used to determine the extent that environmental or ecosystem factors affect the price of a good usually a home advantages and disadvantages of hedonic pricingthe hedonic pricing model has many advantages including the ability to estimate values based on concrete choices particularly when applied to property markets with readily available accurate data at the same time the method is flexible enough to be adapted to relationships among other market goods and external factors hedonic pricing also has significant drawbacks including its ability to only capture consumers willingness to pay for what they perceive are environmental differences and their resulting consequences for example if potential buyers are not aware of a contaminated water supply or impending early morning construction next door then the price of the property in question will not change accordingly hedonic pricing also does not always incorporate external factors or regulations such as taxes and interest rates which could also have a significant impact on prices example of hedonic pricingconsider home prices which are an easy way to value certain environmental aspects for example a home close to parks or schools may sell for a premium meanwhile a home right on a major highway may sell for less hedonic pricing uses regression to see which factors matter the most and each s relative importance for the home price example the price of the home would be analyzed based on independent variables such as distance from a park with that the result would appear something along the lines of for every mile closer to a park the home value increases by 10 000 | |
where did hedonic pricing originate | american labor economist sherwin rosen first presented a theory of hedonic pricing in 1974 in a paper titled hedonic pricing and implicit markets product differentiation in pure competition 1 | |
what does hedonic mean | the term hedonic originated in the 17th century and is an adjective meaning of relating to or characterized by pleasure or hedonism 2 | |
where is hedonic pricing most commonly used | the hedonic pricing method is most commonly used in real estate the price of a building or piece of land is determined by characteristics of both the property or land itself and its surrounding environment hedonic pricing is used to estimate the extent to which each factor affects the market price of the property the bottom linehedonic pricing identifies price factors according to the premise that price is determined by internal characteristics of the good being sold and by external factors affecting it the model is often used to estimate quantitative values for environmental or ecosystem services that directly affect market prices for homes | |
what is hedonic regression | hedonic regression is the use of a regression model to estimate the influence that various factors have on the price of a good or sometimes the demand for a good in a hedonic regression model the dependent variable is the price or demand of the good and the independent variables are the attributes of the good believed to influence utility for the buyer or consumer of the good the resulting estimated coefficients on the independent variables can be interpreted as the weights that buyers place on the various qualities of the good understanding hedonic regressionhedonic regression is used in hedonic pricing models and is commonly applied in real estate retail and economics hedonic pricing is a revealed preference method used in economics and consumer science to determine the relative importance of the variables which affect the price of or demand for a good or service for example if the price of a house is determined by different characteristics like the number of bedrooms the number of bathrooms proximity to schools etc regression analysis can be used to determine the relative importance of each variable the hedonic pricing regression uses ordinary least squares or more advanced regression techniques to estimate the extent to which several factors affect the price of a product or a piece of real estate like a house the price is defined as the dependent variable and is regressed on a set of independent variables that are believed to influence the price based on economic theory the investigator s intuition or consumer research alternatively an inductive approach such as data mining can be used to screen and determine the variables to include in the model the selected characteristics called attributes of the good may be represented as continuous or dummy variables applications of hedonic regressionthe most common example of the hedonic pricing method is in the housing market wherein the price of a building or piece of land is determined by the characteristics of the property itself e g size appearance features like solar panels or state of the art faucet fixtures and condition as well as characteristics of its surrounding environment e g if the neighborhood has a high crime rate and or is accessible to schools and a downtown area the level of water and air pollution or the value of other homes close by the price of any given house can be predicted by plugging the attributes of that house into the estimated equation for hedonic regression hedonic regression is also used in consumer price index cpi calculations to control for the effect of changes in product quality the price of any good in the cpi basket can be modeled as a function of a set of attributes and when one or more of these attributes changes the estimated impact on the price can be calculated the hedonic quality adjustment method removes any price differential attributed to a change in quality by adding or subtracting the estimated value of that change from the price of the item 1origin of hedonicsin 1974 sherwin rosen first presented a theory of hedonic pricing in his paper hedonic pricing and implicit markets product differentiation in pure competition affiliated with the university of rochester and harvard university in the publication rosen argues that an item s total price can be thought of as a sum of the price of each of its homogeneous attributes an item s price can also be regressed on these unique characteristics to determine the effect of each characteristic on its price 2 | |
what is the heikin ashi technique | the heikin ashi technique averages price data to create a japanese candlestick chart that filters out market noise heikin ashi charts developed by munehisa homma in the 1700s share some characteristics with standard candlestick charts but differ based on the values used to create each candle instead of using the open high low and close like standard candlestick charts the heikin ashi technique uses a modified formula based on two period averages this gives the chart a smoother appearance making it easier to spots trends and reversals but also obscures gaps and some price data the formula for the heikin ashi technique is heikin ashi close open 0 high 0 low 0 close 0 4 heikin ashi open ha open 1 ha close 1 2 heikin ashi high max high 0 ha open 0 ha close 0 heikin ashi low min low 0 ha open 0 ha close 0 where open 0 etc values from the current period open 1 etc values from the prior period ha heikin ashi begin aligned text heikin ashi close frac text open 0 text high 0 text low 0 text close 0 4 text heikin ashi open frac text ha open 1 text ha close 1 2 text heikin ashi high text max text high 0 text ha open 0 text ha close 0 text heikin ashi low text min text low 0 text ha open 0 text ha close 0 textbf where text open 0 text etc text values from the current period text open 1 text etc text values from the prior period text ha text heikin ashi end aligned heikin ashi close 4open0 high0 low0 close0 heikin ashi open 2ha open 1 ha close 1 heikin ashi high max high0 ha open0 ha close0 heikin ashi low min low0 ha open0 ha close0 where open0 etc values from the current periodopen 1 etc values from the prior periodha heikin ashi | |
how to calculate heikin ashi | image by sabrina jiang investopedia 2021 | |
what does heikin ashi tell you | the heikin ashi technique is used by technical traders to identify a given trend more easily hollow white or green candles with no lower shadows are used to signal a strong uptrend while filled black or red candles with no upper shadow are used to identify a strong downtrend reversal candlesticks using the heikin ashi technique are similar to traditional candlestick reversal patterns they have small bodies and long upper and lower shadows there are no gaps on a heikin ashi chart as the current candle is calculated using information from the previous candle because the heikin ashi technique smooths price information over two periods it makes trends price patterns and reversal points easier to spot candles on a traditional candlestick chart frequently change from up to down which can make them difficult to interpret heikin ashi charts typically have more consecutive colored candles helping traders to identify past price movements easily the heikin ashi technique reduces false trading signals in sideways and choppy markets to help traders avoid placing trades during these times for example instead of getting two false reversal candles before a trend commences a trader who uses the heikin ashi technique is likely only to receive the valid signal heikin ashi vs renko chartsheikin ashi charts are constructed based on averages over two periods renko charts on the other hand are created by only showing movements of a certain size while a renko chart has a time axis the boxes or bricks are not governed by time only by movement while a new ha candle will form every period a renko chart will only produce a new brick box when the price has moved a certain amount image by sabrina jiang investopedia 2020limitations of the heikin ashi techniquesince the heikin ashi technique uses price information from two periods a trade setup takes longer to develop usually this is not an issue for swing traders who have time to let their trades play out however day traders who need to exploit quick price moves may find heikin ashi charts are not responsive enough to be useful the averaged data also obscures important price information daily closing prices are considered important by many traders yet the actual daily closing price is not seen on a heikin ashi chart the trader only sees the averaged ha closing value in order to control risk it is important the trader is aware of the actual price and not just the ha averaged values another important element in technical analysis that is missing from heikin ashi charts is price gaps many traders use gaps for analyzing price momentum setting stop loss levels or triggering entries example using heikin ashi candlestickshieken ashi charts can be applied to any market and most charting platforms now have them included as a functionality there are five primary signals that identify trends and buying opportunities these signals may make locating trends or trading opportunities easier than with traditional candlesticks the trends are not interrupted by false signals as often and are thus more easily spotted image by sabrina jiang investopedia 2020the chart example above shows how heikin ashi charts can be used for analysis and making trading decisions on the left there are long red candles and at the start of the decline the lower wicks are quite small as the price continues to drop the lower wicks get longer indicating that the price dropped but then was pushed back up buying pressure is starting to build this is followed by a strong move to the upside the upward move is strong and doesn t give major indications of a reversal until there are several small candles in a row with shadows on either side this shows indecision traders can look at the bigger picture to help determine whether they should go long or short the charts can also be used to keep a trader in a trade once a trend begins it s usually best to stay in a trade until the heikin ashi candles change color however a change of color doesn t always mean the end of a trend it could just be a pause | |
what is an heir | an heir is defined as an individual who is legally entitled to inherit some or all of the estate of another person who dies intestate which means the deceased person failed to establish a legal last will and testament during their living years in such a scenario the heir receives property according to the laws of the state in which the property is probated heirs who inherit property are typically children descendants or other close relatives of the decedent spouses typically are not legally considered to be heirs as they are instead entitled to properties via marital or community property laws understanding heir | |
when there is more than one heir with the same relationship to the deceased such as the case when there are two siblings those individuals typically divide up the estate equally the portion of a deceased person s estate that s bequeathed to an heir is known as an inheritance this can involve cash stocks bonds real estate and other personal property such as automobiles furniture antiques artwork and jewelry | there are many specific types of heirs including the following intestate | |
when a person dies without a will a court administrator will oversee the deceased s estate they will gather all assets pay off any liabilities and distribute the remaining assets to the individuals considered to be the beneficiaries of the deceased the heirs at law the probate process is determined by state law | the remaining assets are passed to the beneficiaries via intestate succession determining the hierarchy of how the assets will be given the intestate succession starts with the deceased s spouse then the children and then the grandchildren if no living family or heirs at law can be located the assets will go to the state 1heir vs beneficiarywhile the term heir legally refers to a person who receives the property of an individual who died intestate in common parlance the word heir is often used to describe those inheriting property as designated by a will however strictly speaking this usage of the word is factually inaccurate as the proper term for such an individual is a beneficiary which legally defines an individual who is entitled to collect the property as prescribed by a will trust insurance policy or another binding arrangement traditionally speaking jewish christian and islamic laws each have their own sets of customs when it comes to heirs not all heirs are beneficiaries such as in the case of an estranged adult child who is intentionally left out of a will likewise not all beneficiaries are heirs for example a person can designate a friend or companion to receive property in this case the friend is not an heir because he would not be the recipient of property if left intestate because he is not a child or direct relative of the decedent however that friend can accurately be called a beneficiary as designated through the deceased person s will or another arrangement a female heir is often referred to as an heiress particularly if the inheritance involves substantial wealth real world examplesthe rockefeller family is one of the most famous families in the world the wealth was accumulated by john d rockefeller through his business in the oil industry though he gave a significant portion of his wealth to charity his heirs were his two surviving children at the time of his death alta rockefeller and john d rockefeller jr both children during and after rockefeller s lifetime received a significant portion of his wealth as his heirs wealth that has continued to be passed down to family members though technically a beneficiary being the only son of rockefeller jr took over the family office and joined the family businesses considered to be the heir to rockefeller the british line of succession is hereditary and is passed down via bloodline from the monarch to their eldest living child either male or female the current monarch is prince charles iii who took on the role after his mother queen elizabeth ii passed away the heir to the throne is charles s eldest child prince william after prince william the heir to the throne is his eldest child prince george 2 | |
what makes someone an heir | an heir is someone who is legally entitled to inherit the deceased s assets when no will is present heirs are typically children or other living relatives nations and states have laws around inheritance and who qualifies as an heir | |
what is the difference between an heir and a beneficiary | an heir is someone who is set to inherit the property of the deceased when no will or testament has been made a beneficiary is someone who was chosen by the deceased to inherit their property as laid out in a will or testament an heir is typically a close living relative whereas a beneficiary can be anyone who is considered an heir children are considered to be heirs and are the most common example if no children are living then a person s grandchildren are considered to be heirs if a person has no children or grandchildren then the next closest living relative would be considered an heir the bottom linean heir is someone who is entitled to the estate of a recently deceased person most often when the deceased does not leave a will designating a beneficiary an heir is often the child of an individual the term heir has commonly been associated with lines of succession particularly in royal families however the term can also simply refer to any individual who will assume the estate of another individual this can be a child grandchild nephew niece or sibling | |
what is a held by production clause | held by production is a provision in an oil or natural gas property lease that allows the lessee generally an energy company to continue drilling activities on the property as long as it is economically producing a minimum amount of oil or gas the held by production provision thereby extends the lessee s right to operate the property beyond the initial lease term this provision is also a feature of mineral property leases | |
how a held by production clause works | the held by production provision enables energy companies to avoid renegotiating leases upon expiry of the initial primary term and allows them to operate under a secondary term for the entire economic life cycle of an oil or gas field this results in considerable savings to them particularly in geographical areas that have become hot due to prolific output from oil and gas wells with property prices in such areas generally on an upward trend leaseholders would naturally demand significantly higher prices to renegotiate leases according to the law firm holland hart the held by production clause in a lease can also be called the habendum clause a habendum clause in an oil and gas lease typically contains two separate terms the primary term and the secondary term the primary term is a fixed time period and expires at some point in the future the time period under the secondary term is indefinite so long as oil and gas are produced the lease remains in effect 1held by production is a type of mineral rights lease for the oil company where the oil company operating the production facilities on another owner s land has a right to access the minerals or reserves on that land beyond the originally agreed lease term this issue is particularly important in the wake of the shale oil boom in the u s and canada land with these shale resources can command considerable value for some landowners however the shale boom is less welcome news because they have been cut out of the leasing windfall by held by production clauses under held by production clauses oil companies can retain control of the entire leasehold as long as there is at least one well producing a minimum paying quantity of oil or gas on the property minimum paying quantities are generally defined as a value of oil production that exceeds operating costs this can create considerable conflict between landowners and the oil and gas companies operating there examples of a held by production clauseaccording to the energy mineral and law foundation the use of held by production clauses increased dramatically after range resources an independent natural gas company began drilling extremely profitable horizontal hydraulic fracturing wells in 2007 in washington county pennsylvania 2 | |
when the industry became aware of range s successes with the new technique other companies began leasing property for development at skyrocketing prices the competition for acreage caused lease prices to escalate from historical prices of 1 per acre to 500 per acre then to 1 000 per acre and then to as much as 10 000 and more per acre 2 | in order to protect their investments from price rises companies sought held by production clauses in their new leases and in some cases they looked to buy old leases for poorly performing wells and use the new fracking technology to increase profits 2 | |
what is a held for trading security | a held for trading security is a debt or equity investment that investors purchase with the intent of selling within a short period of time usually less than one year within that time frame the investor hopes to see appreciation in the value of the security and sell it for a profit because of accounting standards companies have to classify investments in debt or equity securities when they are purchased other than held for trading other options include held to maturity or available for sale understanding a held for trading securityheld for trading securities can generate a profit from short term price changes when investors sell them in the near term they are short term assets and their accounting reflects that fact the value of these investments is reported at fair value and unrealized gains and or losses are included as earnings the initial cost basis of these investments equals their fair value at the time of purchase over time the market value of trading securities changes and investors must report any unrealized gains and or losses as earnings the calculation of those gains and losses involves comparing a trading security s fair market value to its original purchase cost basis held for trading securities are classified as current assets since they will be sold within a year and the cash flows from these securities are considered operating cash flows cash flows from held to maturity and available for sale securities are cash flows from investing held for trading security and fair value adjustmentany increase or decrease in the fair value of a held for trading security requires an accounting adjustment one must add or subtract the change from the security s previously reported value on the financial statements an accountant achieves this by debiting an increase or crediting a decrease in the fair value change to an account called securities fair value adjustment trading which is a sub account of the asset account for trading securities a debit or a credit to the account of securities fair value adjustment is an accumulation or deficit respectively to the fair value of the trading security changes in the fair value of a held for trading security from one period to another become an unrealized gain or loss to earnings a debit to the account of securities fair value adjustment from an increase in the security s fair value requires a credit to record the unrealized gain that adds to net income conversely a credit to the account of securities fair value adjustment from a decrease in the security s fair value requires a debit to record the unrealized loss that reduces net income example of a held for trading securitysuppose that company abc purchased a security with the intent of selling it within a year that security was recorded at its purchase costs when it was bought now suppose that nine months have gone by and the security had a fair value of 1 000 as last reported on its financial statements in the following quarter by the end of the current accounting period the security is trading for 1 200 in the market which is the fair value of the security per accounting standards the company will have to record the new fair value of the security in its quarterly reporting the fair value adjustment accounting requires a debit of 200 to the securities fair value adjustment account given the original value of 1 000 the trading security account for this particular security ends the period with a fair value of 1 200 the 200 is also an unrealized gain that is reflected in earnings | |
what is held order | a held order is a market order that requires prompt execution for an immediate fill this can be contrasted with a not held order which provides brokers with both time and price discretion to try and get a better fill for a customer understanding held orderin most cases a trade is expected to be executed at the best offer for buy orders or at the best bid for sell orders market orders are a common example of held orders when filling a held order traders have very little discretion in finding a price because time is scarce typically they will be required to match the highest bid or lowest offer to facilitate an immediate transaction 1for example if the bid ask market spread in apple inc aapl is 156 90 157 00 and a trader receives a held order to purchase 100 shares they would place a buy order at the offer price of 157 00 which would be executed immediately under normal market conditions held orders are used by investors who need to change their exposure to a particular stock and want their order s executed without delay there are times when a placing held order is not advisable one such instance is when you are dealing in illiquid stocks suppose a small cap stock has a wide bid ask market spread of 1 50 2 25 a trader who uses a held order is forced to pay the 33 3 spread 0 75 2 25 to get prompt execution in this instance the trader may get a better price if they use discretion and sit at the top of the bid and incrementally increase the order price to entice a seller out of the woodwork of course the 33 3 spread may be a reasonable price to pay if the trader is playing a breakout or closing a position that was a fat finger error to begin with held orders implicitly come with an immediate or cancel ioc condition attached to them held order usesmost investors want to get the best price possible but there are three situations that held orders are ideal for | |
what are held to maturity htm securities | held to maturity htm securities are purchased to be owned until maturity for example a company s management might invest in a bond that they plan to hold to maturity there are different accounting treatments for htm securities compared to securities that are liquidated in the short term | |
how held to maturity htm securities work | bonds and other debt vehicles such as certificates of deposit cds are the most common form of htm investments bonds and other debt vehicles have determined or fixed payment schedules and a fixed maturity date and they are purchased to be held until they mature since stocks do not have a maturity date they do not qualify as held to maturity securities for accounting purposes corporations use different categories to classify their investments in debt and equity securities in addition to htm securities other classifications include held for trading and available for sale on a company s financial statements these different categories are treated differently in terms of their investment value as well as related gains and losses htm securities are typically reported as a noncurrent asset they have an amortized cost on a company s financial statements amortization is an accounting practice that adjusts the cost of the asset incrementally throughout its life earned interest income appears on the company s income statement but changes in the market price of the investment do not change on the firm s accounting statements htm securities are only reported as current assets if they have a maturity date of one year or less securities with maturities over one year are stated as long term assets and appear on the balance sheet at the amortized cost meaning the initial acquisition cost plus any additional costs incurred to date unlike held for trading securities temporary price changes for held to maturity securities do not appear in corporate accounting statements both available for sale and held for trading securities appear as fair value on accounting statements advantages and disadvantages of htm securitiesthe appeal of htm securities depends on several factors including whether or not the purchaser can afford to hold the investment until it matures or if there might be an anticipated need to sell before that time the investor has the predictability of regular returns from htm investments these regular earnings allow the holder to make plans for the future knowing this income will continue at the set rate until the final return of capital upon maturity since the interest rate received is fixed at the date of purchase it s possible that the market interest rates will increase this would leave the investor at a relative disadvantage in this scenario because if the rates go up the investor is earning less than if they had the funds invested at the current higher market rate for the most part htm securities are long term government or high credit rated corporate debt however investors must understand the risk of default if while holding the long term debt the underlying company declares bankruptcy htm investments allow for future planning with the assurance of their principal return on maturity they re considered safe investments with little to no risk the interest rate of earnings is locked in and will not change the fixed return is predetermined so there s no benefiting from a favorable change in market conditions the risk of default while slight still must be considered held to maturity securities are not short term investments rather they are meant to be held to term example of an htm securitythe 10 year u s treasury note is backed by the u s government and is one of the safest investments for investors 1 the 10 year bond pays a fixed rate of return for example as of may 2024 the 10 year bond pays around 4 5 and comes in various maturities 2let s say apple aapl wants to invest in a 1 000 10 year bond and hold it to maturity every year apple will get paid 4 5 ten years from now apple will receive the face value of the bond or 1 000 regardless of whether interest rates rise or fall over the next 10 years apple will receive 4 5 or 45 each year in interest income | |
what are examples of htm securities | bonds and other debt vehicles like certificates of deposit cds are the most common type of htm investments they have determined or fixed payment schedules and a fixed maturity date and are bought to be held until maturity | |
how are htm securities reported on business financial statements | htm securities are typically reported as a noncurrent asset and have an amortized cost on a company s financial statements they are only reported as current assets if they mature in one year or less | |
what is an example of htm securities | u s treasury bonds which range in term from one month to 30 years are backed by the u s government and are one of the safest investments for investors the bottom lineheld to maturity htm securities as the name implies are purchased to be owned until they mature different accounting treatments occur for htm securities vs securities that are liquidated in the short term | |
what is a helicopter drop helicopter money | a helicopter drop refers to a term first coined by milton friedman as a rhetorical device intended to abstract away the effects of any monetary policy transmission mechanisms in a thought experiment regarding the addition of cash to the bank accounts of all citizens as if dropped from a helicopter overnight 1 in recent decades this term has come to refer to a figurative application of friedman s metaphor as a type of monetary stimulus strategy that increases the quantity of the money supply and directly distributes cash to the public in order to spur inflation or rising prices and economic growth helicopter drop policies have become a common feature of the response from policymakers to large scale economic shocks since 2000 understanding a helicopter drop helicopter money a helicopter drop is an expansionary fiscal or monetary policy that is financed by an increase in an economy s money supply it could be an increase in spending or a tax cut but it involves printing large sums of money and distributing it to the public in order to stimulate the economy mostly the term helicopter drop is largely a metaphor for unconventional measures to jump start the economy during deflationary periods which consist of falling prices while helicopter drop was first mentioned by noted economist milton friedman it gained popularity after former federal reserve fed chair ben bernanke made a passing reference to it in a november 2002 speech when he was a new fed governor that single reference earned bernanke the sobriquet of helicopter ben the nickname that stayed with him during much of his tenure as a fed member and chair bernanke s reference to a helicopter drop occurred in a speech that he made to the national economists club about measures that could be used to combat deflation in that speech bernanke defined deflation as a side effect of a collapse in aggregate demand or such a severe curtailment in consumer spending that producers would have to cut prices on an ongoing basis to find buyers he also said the effectiveness of anti deflation policy could be enhanced by cooperation between monetary and fiscal authorities and referred to a broad based tax cut as essentially equivalent to milton friedman s famous helicopter drop of money 2bernanke s critics subsequently used this reference to disparage his economic policies though others argue that his handling of the u s economy during and after the great recession of 2008 09 was effective faced with the biggest recession since the 1930s and with the u s economy on the brink of catastrophe bernanke used some of the very same methods outlined in his 2002 speech to combat the slowdown such as expanding the scale and scope of the fed s asset purchases a policy known as quantitative easing qe examples of a helicopter dropjapan which faced stagnant growth throughout the 21st century toyed with the idea of helicopter money in 2016 once again bernanke was at the forefront of the conversation when he met with japanese prime minister shinzo abe and bank of japan s haruhiko kuroda to discuss further monetary policy options one of which was issuing large scale long dated perpetual bonds in the ensuing months japan did not formally implement a helicopter drop but instead opted for further large scale asset purchases a notable recent example of a helicopter drop policy is the direct to taxpayers stimulus payments made by the trump administration combined with simultaneous qe by the fed in response to the economic crisis induced by various government lockdowns of the economy during the covid 19 pandemic initial payments of 1 200 per taxpayer were authorized under the cares act in march 2020 another round of stimulus containing 600 payments was then passed in december of 2020 3the fed and the covid 19 pandemicsome could argue that the fed s stimulus measures in response to the covid 19 pandemic and the resulting recession could be considered helicopter drop money in response to the economic hardship facing the united states the fed took unprecedented steps to stabilize the financial markets and the banking system as well as provide direct support to small businesses the result was an injection of trillions of dollars into the u s economy the fed s stimulus actions were carried out through multiple facilities including the following the paycheck protection program liquidity facility ppplf was established to help small businesses keep workers on their payroll the fed supplied money or liquidity to participating financial institutions so that the banks could in turn lend the money to small businesses since the money has to be repaid it might not be the purest example of helicopter money but repayment has yet to be completed 4 the main street lending program which included five credit facilities was established to support and provide loans to both small and mid sized companies that were financially sound before the covid 19 pandemic the program ended on january 8 2021 5 one of the fed s programs in coordination with the u s department of the treasury created a facility to directly purchase existing investment grade corporate bonds of u s companies the facility was called the secondary market corporate credit facility smccf and represented the first time in the fed s history that the central bank bought corporate bonds and exchange traded funds etfs that contained bonds 6 the fed s purchases reduced the outstanding supply of bonds enabling companies to issue new bonds to raise capital or funds stimulative actions of injecting money into the economy by buying bonds and the issuance of loans swelled the fed s balance sheet from 4 7 trillion on march 17 2020 to more than 7 3 trillion by january 5 2021 7 8 | |
what is a hell or high water contract | a hell or high water contract also known as a promise to pay contract is a non cancelable contract a hell or high water contract stipulates that the purchaser must make the specified payments to the seller regardless of any difficulties they may encounter hell or high water clauses bind the purchaser or lessee to the terms of the contract until the contract s expiration understanding hell or high water contractshell or high water contracts require payment whether or not the good or service is working as planned generally speaking hell or high water contracts are used when the provider of a service or product is taking a large risk on behalf of the client this risk can refer to the amount of capital committed the risk can also refer to the risk that there is not another purchaser on the market because the product is highly customizable in a hell or high water contract the party who is obligated to pay effectively takes on all the risk of default from the seller lessor or lender 1 this can create an incentive that will induce the obligor to engage in a transaction that they otherwise might refuse based on the obligee s default risk the term itself comes from the colloquial phrase come hell or high water which is used to indicate an unconditional commitment to carry through on a course of action no matter what circumstances might arise the phrase is meant to imply that the speaker or obligee will follow through on their commitment even in the face of any severe adversity or catastrophe that may be beyond their control not limited to demonic or diluvial influences the references to hell and high water are biblical allusions to the biblical hell and to noah s flood respectively which represent earth shattering cataclysms special considerationshell or high water contracts can be enforced even in instances where there is some fault or defect in the property at the center of the agreement for example if a lessee agrees to rent or lease a piece of equipment or machinery under hell or high water terms they are responsible for those payments even if the equipment malfunctions the vendor or lessor might only handle the financing aspect of the transaction and otherwise hold a passive role in regards to the equipment itself the lessee in such an agreement usually selects the equipment they wish to procure the lessor then buys the chosen item that is in turn leased to the customer a financing agreement with hell or high water language is designed to ensure that the lessee will pay the lessor under no uncertain terms if there is an issue with the equipment the lessee receives the lessor typically is not at fault because the lessee chose the equipment they wanted to rent the equipment may be shipped directly from the manufacturer or supplier to the lessee without the lessor ever coming into contact with it flaws in the equipment may be because of an issue with its manufacturing any warranties regarding the functionality of the equipment might fall to the supplier or manufacturer to fulfill 1hell or high water contracts in financehell or high water contracts can be utilized in project finance transactions acquisition deals and high yield indentures for example an acquisition deal with hell or high water language can direct the prospective buyer in the agreement to shoulder the burden of addressing any necessary divestitures or litigation that might result from antitrust regulatory issues the viability of the acquisition agreement could thus be tied directly to the buyer s ability to resolve such matters and clear the way for the deal to proceed | |
what is the help wanted index | the conference board s help wanted index hwi measures how efficiently employers are matching jobs to the available workforce the unemployed and is an important gauge on the economy 1the conference board looking for a way to augment the portfolio of employment statistics created the help wanted advertising index in 1951 1 the most obvious contribution made by the hwi is its measure of the changes in employment demand as represented on the classified pages of newspapers which is considered a leading indicator of unemployment the arguably more meaningful contribution is the hwi s indirect measure of the slack in the job market that is how many jobs are going unfilled or how efficient the job matching process is understanding the help wanted index hwi | |
when the help wanted index hwi is rising it means there are a relatively large amount of positions needing to be filled this can be interpreted as a shortage of workers because employers may have to raise wages to attract workers wage inflation could ensue which could have a negative effect on bond and equity markets | created first in 1951 the index totaled the lines of help wanted classified ads from 51 leading newspapers each from a different metropolitan statistical area around the united states 1the hwi was restructured to equal 100 in 1987 and is released to the public in a monthly press release the conference board releases a national number for the hwi along with regional numbers representing nine segments of the country and a percentage number representing the proportion of the labor market with rising want ad volume the current hwi report can be found on the conference board s website the conference board is composed of a board of chairmen and trustees and its voting members most recently these positions were filled by many high ranking executives from corporations including deutsche bank bbva deere company johnson johnson monsanto mastercard general electric novartis and state farm insurance | |
what is the university of iowa tippie college of business | the university of iowa tippie college of business is the business school at the university of iowa in iowa city iowa founded in 1921 it offers both undergraduate and graduate programs prior to 2019 the university of iowa tippie college of business was well known for its master of business administration mba which had been rated as the best finance focused mba program in the world by the financial times in 2016 in 2019 the school graduated its final cohort of full time mba students although it continues to offer a professional mba program for those wishing to pursue their mba on a part time basis understanding the university of iowa tippie college of businesspreviously known as the university of iowa college of commerce the school became known as the university of iowa tippie college of business in 1999 following a naming gift by the entrepreneur and philanthropist henry b tippie today the university of iowa tippie college of business is home to over 4 000 students including 3 000 undergraduate students and 1 500 students in graduate level programs the college s 450 faculty members maintain dedicated research centers in subjects such as accounting economics and finance the school is also home to the famous iowa electronic markets iem which is a leading research institution for the study of prediction markets in addition to offering undergraduate majors in the core business disciplines of accounting economics finance and marketing the university of iowa tippie college of business also offers a professional mba program designed for students wishing to complete their mbas while continuing to advance their careers although this program is offered at four locations throughout the state of iowa additional programs are available for those wishing to study remotely or abroad this includes an online mba program as well as international mba programs based in italy and hong kong graduate students who don t want to pursue an mba can choose to do a master of accountancy mac degree a master s and certificate in business analytics or a master of finance graduates of the university of iowa tippie college of businessstudents attending the university of iowa tippie college of business can benefit from a wide range of dedicated research institutions located at the iowa city campus in addition to the iem which studies and develops prediction markets this network includes other influential institutions in areas such as marketing small business development and investment banking examples of such institutions include the small business development center which supports student entrepreneurs with business model development and various aspects of entrepreneurial training the vaughan institute which provides training on risk management for both corporate finance and insurance applications and the hawkinson institute which is focused on investment banking | |
what is henry hub | henry hub is a natural gas pipeline located in erath louisiana that serves as the official delivery location for futures contracts on the new york mercantile exchange nymex the hub is owned by sabine pipe line llc and has access to many of the major gas markets in the united states the hub connects to four intrastate and nine interstate pipelines including the transcontinental acadian and sabine pipelines understanding henry hubthe henry hub pipeline is the pricing point for natural gas futures on the new york mercantile exchange the nymex contract for deliveries at henry hub began trading in 1990 and is deliverable 18 months in the future the settlement prices at henry hub are used as benchmarks for the entire north american natural gas market and parts of the global liquid natural gas lng market importance of hub pricinghenry hub is an important market clearing pricing concept because it is based on the actual supply and demand of natural gas as a stand alone commodity other natural gas markets like europe have fragmented hub pricing points this means natural gas prices are often indexed to crude oil which can have very different supply and demand factors affecting its price attempts are being made to develop european hub pricing points in the netherlands and the uk but this has proved difficult so far due to competition from national hubs asian natural gas markets are even more fragmented and have no defined hub pricing point although singapore would like to serve this regional role consequently all asian natural gas prices are either indexed to crude oil or linked to henry hub henry hub and liquid natural gashenry hub is also used in delivery contracts for lng on a global basis despite being a spot price for natural gas that is very specific to the north american gas market some global gas producers like qatar and australia prefer to base the pricing mechanism of their natural gas deliveries on spot prices rather than indexing to the price of oil this is especially true when crude oil prices are falling gas producers can rely on henry hub as a source of natural gas spot pricing to meet this need because of its large trading volume clear pricing transparency and high liquidity henry hub prices are widely quoted by futures exchanges and other media sources so parties to a contact can easily obtain this pricing data | |
who was herbert a simon | herbert a simon 1916 2001 was an american economist and political scientist who won the nobel memorial prize in economic sciences in 1978 for his contributions to modern business economics and administrative research he is widely associated with the theory of bounded rationality which states that individuals do not make perfectly rational decisions because of both cognitive limits the difficulty in obtaining and processing all the information needed and social limits personal and social ties among individuals 1simon earned his ph d from the university of chicago in 1943 after graduating he worked in research and held teaching posts at a handful of universities before joining the carnegie mellon university faculty in 1949 he taught there for more than 50 years as a professor of administration psychology and computer science he also had a hand in the establishment of several of carnegie mellon s departments and schools including the graduate school of industrial administration which is now known as the tepper school of business 1in addition to the nobel memorial prize in economics simon received the a m turing award in 1975 for his work in computer science including his contributions to the area of artificial intelligence 2 he also won the u s national medal of science in 1986 3simon authored dozens of journal articles and 27 books during his lifetime including administrative behavior 1947 the sciences of the artificial 1968 and models of bounded rationality 1982 4herbert a simon and bounded rationalityherbert a simon and his theories on economic decision making challenged classical economic thinking including the ideas of rational behavior and the atomistic individualism of economic man rather than subscribing to the idea that economic behavior was rational and based upon all available information to secure the best possible outcome for an individual optimizing simon believed decision making was about achieving outcomes that were good enough for the individual based on their limited information and balancing the interests of others simon called this satisficing his term was a combination of the words satisfy and suffice 1according to simon because humans cannot possibly obtain or process all the information needed to make fully rational decisions they instead seek to use the information they do have to produce a satisfactory result or one that is good enough he described humans as being bounded by their own cognitive limits 1in addition to cognitive limits simon also wrote about how personal relations and social organizations constrain decision making this means that individuals often do not make decisions considering only their own interests or the individual s utility maximization but must negotiate exert power over or otherwise navigate the interests of others and the rules of the institutional setting within which they operate 1together these cognitive and social limits and the way they shape decision making are commonly known as the theory of bounded rationality under bounded rationality decision makers must settle for finding satisfactory solutions to the problem or problems in front of them while being mindful of how other decision makers in the company are solving their own problems within these bounds decision making can still be rational in that it consists of comparing the relative costs benefits and risks to achieve a desired result bounded rationality would also go on to become a foundational element in behavioral economics which at times also questions whether human decision making is really rational at all | |
when the royal swedish academy of sciences awarded simon the nobel memorial prize in economics for his work in this area it noted that much of modern business economics and administrative research are based on his ideas 5 simon replaced the concept of the all knowing profit maximizing entrepreneur with the idea of cooperating decision makers within a company who face informational personal and social limitations | herbert a simon and artificial intelligenceherbert a simon is considered a pioneer in the foundations of artificial intelligence in the mid 1950s simon and allen newell of the rand corporation attempted to simulate human decision making on computers in 1955 they wrote a computer program that was able to prove mathematical theorems the pair called it their machine that thinks 2 | |
what is herd instinct | the term herd instinct refers to a phenomenon where people join groups and follow the actions of others under the assumption that other individuals have already done their research herd instincts are common in all aspects of society even within the financial sector where investors follow what they perceive other investors are doing rather than relying on their own analysis 1in other words an investor who exhibits herd instinct generally gravitates toward the same or similar investments as others herd instinct at scale can create asset bubbles or market crashes via panic buying and panic selling understanding herd instincta herd instinct is a behavior wherein people tend to react to the actions of others and follow their lead this is similar to the way animals react in groups when they stampede in unison out of the way of danger perceived or otherwise herd instinct or herd behavior is distinguished by a lack of individual decision making or introspection causing those involved to think and behave in a similar fashion to everyone else around them human beings are prone to a herd mentality conforming to the activities and direction of others in multiple ways from the way we shop to the way we invest the fear of missing out on a profitable investment idea is often the driving force behind herd instinct especially in the wake of good news or after an analyst releases a research note but this can be a mistake herd instinct also known as herding has a history of starting large unfounded market rallies and sell offs that are often based on a lack of fundamental support to justify either herd instinct is a significant driver of asset bubbles and market crashes in financial markets 2 the dotcom bubble of the late 1990s and early 2000s is a prime example of the ramifications of herd instinct in the growth and subsequent bursting of that industry s bubble because this type of behavior is instinctual those who don t succumb to it can often feel distressed or fearful if the crowd is generally going in one direction an individual may feel they re wrong by going the opposite way or they may fear being singled out for not jumping on the bandwagon working with a financial professional may help you curb your herd instincts so you can make sound financial decisions human nature to follow the crowdwe all cherish our individuality and insist that we take responsibility for our own welfare by making decisions based on our own needs and wants but it is natural for human beings to want to feel as though they re part of a community of people with shared cultural and socioeconomic norms so it shouldn t come as a surprise to find that it s just a part of human nature to follow the crowd investors can be induced into following the herd whether through buying at the top of a market rally or jumping off the ship in a market sell off behavioral finance theory attributes this conduct to the natural human tendency to be swayed by societal influences that trigger the fear of being alone or the fear of missing out 1another motivating force behind crowd behavior is our tendency to look for leadership in the form of the balance of the crowd s opinion we think that the majority must be right or in the form of a few key individuals who seem to be driving the crowd s behavior by virtue of their uncanny ability to predict the future 3in times of uncertainty we look to strong leaders to guide our behavior and provide examples to follow the seemingly omniscient market guru is but one example of the type of individual who purports to stand as an all knowing leader of the crowd but whose fa ade is the first to crumble when the tides of mania eventually turn | |
don t be a lemming an uninformed investor who exhibits herd mentality and invests without doing their own research often loses money 4 | herding and investment bubblesan investment bubble occurs when exuberant market behavior drives a rapid escalation in the price of an asset above and beyond its intrinsic value the bubble continues to inflate until the asset price reaches a level beyond fundamental and economical rationality 5at this stage in a bubble s existence further increases in the cost of the asset often are contingent purely on investors continuing to buy in at the highest price when investors are no longer willing to buy at that price level the bubble begins to collapse in speculative markets the burst can incite far reaching corollary effects 52some bubbles occur organically driven by investors who are overcome with optimism about a security s price increase and a fear of being left behind as others realize significant gains speculators are drawn to invest and thus cause the security price and trading volume to climb even higher the irrational exuberance over dotcom stocks in the late 1990s was driven by cheap money easy capital market overconfidence and over speculation it did not matter to investors that many dotcoms were generating no revenue much less any profits the herding instincts of investors made them anxious to pursue the next initial public offering ipo while completely overlooking the traditional fundamentals of investing just as the market peaked investment capital began to dry up which led to the bursting of the bubble and steep investment losses 65 | |
how to avoid herd instinct | herding may be instinctual but there are ways for you to avoid following the crowd especially if you think you ll be making a mistake by doing so it requires some discipline and a few considerations try following some of these suggestions herd mentality faqsherding or following the crowd can cause trends to amplify well beyond fundamentals as people pile into investments for fear of missing out or because they have heard something positive but have not actually done their own due diligence prices can skyrocket this irrational exuberance can lead to unstable asset bubbles that ultimately pop in reverse sell offs can turn into market crashes as people pile in to sell for no other reason than others are doing so which can turn into panic selling herding behavior can have some benefits it allows novice or uninformed investors to benefit from the due diligence and research of others passive index investing for instance is a herding type strategy that relies on simply matching the broader market s performance herd instinct can also let the novice trader cut their losses early since it is often better to sell along with the crowd than risk being a bag holder herd instinct appears in several contexts and throughout human history aside from various asset bubbles and manias herding can help explain mob behavior or riots fads conspiracy theories mass delusions political and social movements sports fandom and many others for instance people may rush out to buy the newest smartphone because of its popularity with other consumers a good way to avoid this is to make investment decisions that are based on sound objective criteria and not let emotions take over another way is to adopt a contrarian strategy whereby you buy when others are panicking picking up assets while they are on sale and selling when euphoria leads to bubbles 9at the end of the day it is human nature to be part of a crowd and so it can be difficult to resist the urge to deviate from your plan passive investments and robo advisors provide good ways to keep your hands off of your investments | |
what is the herfindahl hirschman index hhi | the herfindahl hirschman index hhi is a common measure of market concentration and is used to determine market competitiveness often pre and post merger and acquisition m a transactions the index measures the size of companies relative to the size of the industry they are in and the amount of competitiveness the hhi is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers it can range from close to zero to 10 000 with lower values indicating a less concentrated market investopedia crea taylorformula and calculation of the herfindahl hirschman index hhi the hhi is a commonly accepted measure of market concentration it is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers it can range from close to zero to 10 000 the u s department of justice uses the hhi for evaluating potential merger antitrust issues 1h h i s 1 2 s 2 2 s 3 2 s n 2 where s n the market share percentage of firm n expressed as a whole number not a decimal begin aligned hhi s 2 1 s 2 2 s 2 3 dots s 2 n textbf where s n text the market share percentage of firm n qquad text expressed as a whole number not a decimal end aligned hhi s12 s22 s32 sn2 where sn the market share percentage of firm n expressed as a whole number not a decimal | |
what the herfindahl hirschman index hhi can tell you | the closer a market is to a monopoly the higher the market s concentration and the lower its competition if for example there was only one firm in an industry that firm would have 100 market share and the hhi would equal 10 000 indicating a monopoly if there were thousands of firms competing each would have roughly 0 market share and the hhi would be close to zero indicating nearly perfect competition the u s department of justice considers a market with an hhi of less than 1 500 to be a competitive marketplace an hhi of 1 500 to 2 500 to be a moderately concentrated marketplace and an hhi of 2 500 or greater to be a highly concentrated marketplace 2as a general rule mergers that increase the hhi by more than 200 points in highly concentrated markets raise antitrust concerns as they are assumed to enhance market power under section 5 3 of the horizontal merger guidelines jointly issued by the justice department and the federal trade commission ftc 2the primary advantage of the hhi is the simplicity of the calculation needed to determine it and the small amount of data required for the calculation the primary disadvantage of the hhi stems from the fact that it is such a simple measure that it fails to take into account the complexities of various markets in a way that allows for a genuinely accurate assessment of competitive or monopolistic market conditions regulators use the hhi index to measure the largest companies in a particular industry to determine if that industry should be considered competitive or close to being a monopoly 2example of the herfindahl hirschman index hhi the hhi is calculated by taking the market share of each firm in the industry squaring them and summing the result as depicted in the equation above consider the following hypothetical industry with four total firms the hhi is calculated as h h i 4 0 2 3 0 2 1 5 2 1 5 2 1 600 900 225 225 2 950 begin aligned hhi 40 2 30 2 15 2 15 2 1 600 900 225 225 2 950 end aligned hhi 402 302 152 152 1 600 900 225 225 2 950 this hhi value is considered a highly concentrated industry as expected because there are only four firms however the number of firms in an industry does not necessarily indicate anything about market concentration which is why calculating the hhi is important for example assume an industry has 20 firms firm 1 has a market share of 48 59 and each of the 19 remaining firms has a market share of 2 71 each the hhi would be exactly 2 500 indicating a substantially highly concentrated market if firm 1 had a market share of 35 82 and each of the remaining firms had a 3 38 market share the hhi would be exactly 1 500 indicating a competitive marketplace 2limitations of the herfindahl hirschman index hhi the basic simplicity of the hhi carries some inherent disadvantages primarily in terms of failing to define the specific market that is being examined in a proper realistic manner for example consider a situation in which the hhi is used to evaluate an industry determined to have 10 active companies and each company has about a 10 market share using the basic hhi calculation the industry would appear highly competitive however within the marketplace one company might have as much as 80 to 90 of the business for a specific segment of the market such as the sale of one specific item that firm would thus have nearly a total monopoly for the production and sale of that product another problem in defining a market and considering market share can arise from geographic factors this problem can occur when companies within an industry have roughly equal market share but they each operate only in specific areas of the country so that each firm in effect has a monopoly within the specific marketplace in which it does business for these reasons for the hhi to be properly used other factors must be taken into consideration and markets must be very clearly defined history of the herfindahl hirschman index hhi the concept behind the hhi initially emerged in a 1945 book by german economist albert o hirschman titled national power and the structure of foreign trade the method proposed by hirschman differed from existing measures of concentration by placing a more significant weighting on larger firms whose greater market share has a greater impact on the level of competitiveness in the market 3a few years after hirschman outlined this system for measuring market concentration american economist orris c herfindahl repurposed the idea in his 1950 doctoral dissertation concentration in the u s steel industry 3whereas hirschman applied the idea to the concentration of imports and exports on a countrywide basis herfindahl used the framework to analyze the competitiveness of the steel industry herfindahl refers to hirschman s work in a footnote 3 | |
what does the herfindahl hirschman index hhi mean | the herfindahl hirschman index hhi is a common measure of market concentration and is used to determine market competitiveness often pre and post merger and acquisition m a transactions the closer a market is to a monopoly the higher the market s concentration and the lower its competition | |
how do i interpret the herfindahl hirschman index hhi | a market with an hhi below 1 500 is considered a competitive marketplace an hhi of 1 500 to 2 500 is moderately concentrated and an hhi of 2 500 or greater is highly concentrated as a general rule mergers that increase the hhi by more than 200 points in highly concentrated markets raise antitrust concerns as they are assumed to enhance market power 2 | |
what is the main advantage of the herfindahl hirschman index hhi | the primary advantage of the hhi is the simplicity of the calculation and the small amount of data required for the calculation also firms are weighted according to their size which makes the hhi superior to other measures like the concentration ratio the bottom linethe herfindahl hirschman index hhi is used to determine market competitiveness it measures the degree of concentration within a specific market a market with an hhi of less than 1 500 is considered a competitive marketplace an hhi of 1 500 to 2 500 is moderately concentrated and an hhi of 2 500 or greater is highly concentrated 2 | |
what is the heritage and stabilization fund hsf | the heritage and stabilization fund is a sovereign wealth fund established in march 2007 by the republic of trinidad and tobago government it was previously known as the interim revenue stabilization fund which was set up in 2000 the primary objectives of the fund are to save and invest surplus petroleum production revenues to support and sustain public expenditures during periods of revenue downturn and to provide a heritage for future generations of the nation 12investopedia jiaqi zhouunderstanding the heritage and stabilization fund hsf the heritage and stabilization fund was created in the heritage and stabilization act no 6 of 2007 it is denominated in u s dollars and its fiscal year ends in september the fund provides a cushion to the economy of the islands in times when the price of oil or natural gas has fallen by the end of 2022 the fund had net assets of 4 6 billion down from 5 5 billion in 2021 compared with a value of 1 4 billion in 2007 34rules of the fundaccording to its governing legislation the fund is intended to a cushion the impact on or sustain public expenditure capacity during periods of revenue downturn whether caused by a fall in prices of crude oil or natural gas b generate an alternate stream of income to support public expenditure capacity as a result of revenue downturn caused by the depletion of non renewal petroleum resources and c provide a heritage for future generations of citizens of trinidad and tobago from savings and investment income derived from the excess petroleum revenues 2under the legislation that established the fund withdrawals are limited to 60 of the amount of the shortfall of petroleum revenues for the relevant year or 25 of the balance of the fund at the beginning of that year whichever is the lesser amount the act precludes any withdrawal where the balance standing to the credit of the fund would fall below one billion us dollars if such withdrawal were to be made 5withdrawals are allowed where the petroleum revenues collected in any financial year fall below the estimated petroleum revenues for that financial year by at least 10 withdrawals may be made from the fund 6recent fund historyfollowing a sharp drop in energy prices in 2015 the fund reported that it withdrew approximately 375 million to contribute to its annual budget this was the first such net withdrawal since the fund s inception in its 2016 annual report the fund stated that its cumulative annualized return since inception was 5 34 outperforming the benchmark of 4 87 7in the 2020 2021 fiscal year the fund had a net asset value of 5 47 billion following 2 5 billion in withdrawals intended to ease the hardships faced by the most affected sections of the population and by small and medium sized businesses 8in june 2022 the fund s net asset value shrank to 4 7 billion half a million lower than its nav at the end of the first quarter of that year 3 | |
what is a sovereign wealth fund | a sovereign wealth fund can take many forms but generally it is an investment instrument created by a government or entity for social programs emergency events political purposes or other uses | |
what does stabilization fund mean | a stabilization fund is an instrument created by a government that holds funds for the purpose of stabilizing an economy | |
what is a heritage fund | a heritage fund is a financial instrument designed by a government or other entity intending to use the funds for specific purposes there are various uses for heritage funds some of which include improving or maintaining historical areas and property and providing educational assistance for or supporting the efforts of specific groups of people the bottom linethe heritage and stabilization fund was created by the heritage and stabilization act of 2007 in trinidad and tobago it was intended to hold and invest surplus petroleum revenues to act as a financial buffer during financial downturns and provide an alternate funding method for public expenditures 9 | |
what is the heroes earned retirement opportunities hero act | the heroes earned retirement opportunities hero act is a 2006 law that allows military personnel to fund their individual retirement accounts iras with combat pay it is a tax break designed for those who have served in combat zones under the law combat related compensation paid since january 2004 which is tax free can be used to fund iras understanding the hero actprevious to the act s passage military personnel whose main source of compensation was combat pay would not be able to contribute to an ira either traditional or roth iras this was because combat pay is not ordinarily taxable and only income that is taxable can be contributed to an ira if a person s entire income was earned in a combat zone that person had zero taxable income the act passed on may 18 2006 fixed this catch 22 and backdated the change to january 2004 for those affected now military personnel can create an ira and fund it with combat pay up to the annual limits set by the irs for 2022 the limit is 6 000 per year rising to 6 500 for 2023 people age 50 and over can add another 1 000 a year as a catch up contribution according to the internal revenue service irs to qualify for combat related tax benefits you must be an eligible member who meets one of the following options with service in a recognized area if you receive combat pay as a military member you can now fund an ira up to 6 000 a year in 2022 and up to 6 500 in 2023 if you are under age 50 with that income special considerationswith the passage of this law combat veterans can create either a traditional ira or roth ira account and contribute up to the annual limit military personnel can also create both types of accounts and split the money up assuming they meet income and contribution requirements for roth iras with a traditional ira no taxes are due until the account holder makes a withdrawal presumably after retiring with a roth ira the income taxes on the amount paid are due in that tax year but the proceeds are tax free down the road | |
what is the herrick payoff index | the herrick payoff index is a technical analysis tool that tracks price volume and open interest to identify potential trends and reversals in futures and options markets traders often use the indicator as a measure of crowd psychology and to follow money flows in order to make forward looking decisions understanding the herrick payoff indexthe herrick payoff index takes account of a derivative contract s price volume and open interest to generate bullish and bearish signals since open interest is used in the calculation the technical indicator can only be used in options and futures markets most traders use the herrick payoff index to measure crowd psychology in the futures and options markets in those markets there is less liquidity than the equity markets and more potential for volatility over time bullish continuation signals are generated when prices and open interest rise since traders are increasingly buying into the contract in addition a contract may be poised for a bullish reversal when prices and open interest are falling at the same time because selling pressure is declining as prices are becoming increasingly attractive bearish continuation signals are generated when prices are falling and open interest is rising since traders are increasingly placing bearish bets also a contract may be poised for a bearish reversal when prices are rising and open interest is falling which indicates that bullish traders are losing momentum in general bullish traders are in control when the indicator is above the centerline and bearish traders are in control when the indicator is below the centerline however traders should use the indicator in conjunction with other technical indicators or chart patterns to maximize their odds of placing successful trades using other technical indicators for confirmation can reduce the impact of false signals from the herrick payoff index benefits of the herrick payoff indexone feature of the herrick payoff index is the ability to generate exit signals when trends are still underway as open interest falls the herrick payoff index indicates that the ongoing price trend is likely to reverse with this indicator traders have the potential to get out before the price even starts to decline that is very different from many other technical signals which are lagging indicators most notably any indicator based on moving averages such as the macd will always lag price action in the market exiting a trade before a price drop by using the herrick payoff index yields even larger benefits because its home is in the highly volatile futures and options markets since these derivatives use such high degrees of leverage even a small drop in the underlying security price can easily cause significant losses for example a stock price decrease of just 5 can lead to a loss of more than 25 for a call option downsides of the herrick payoff indexthe herrick payoff index is however often a less reliable guide for entering trades because of the forward looking nature of its reversal signals suppose prices are still declining but open interest is also falling as shown by the herrick payoff index while that may indicate the downward pressure is slowing it does not mean a rally is imminent the asset could instead stabilize in price and stay there for a long time famous trader jesse livermore called such securities listless drifters and he actually disliked them more than outright losses that he would typically sell right away 1however ordinary traders are usually more afraid of losses which are real possibilities when entering trades based on the herrick payoff index buying a security while the price is still falling goes against the common wisdom among speculators that one should not try and catch a falling dagger indeed value investors often try to do just that however value investors rarely use technical indicators like the herrick payoff index even with exit signals there is a heightened danger of a premature move with the herrick payoff index when lagging indicators send false signals their followers at least have the consolation of cutting their losses since the herrick payoff index sends exit signals when prices are still going up interest may revive and the security might just keep going up unimpeded letting go of a rising star like that is something that would frustrate many traders especially those with limited experience investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal | |
what is the situational leadership hersey blanchard model | the situational leadership model or theory also known as the hersey blanchard model suggests that no single leadership style is better than another instead of focusing on workplace factors the model suggests that leaders should adjust their techniques to those they lead and their abilities under the model successful leadership is both task relevant and relationship relevant it is an adaptive flexible style in which leaders are encouraged to consider their followers individuals or a team then consider the factors that impact the work environment before choosing how they will lead this gives them a better chance of meeting their goals understanding the situational leadership hersey blanchard modelthe hersey blanchard model or situational leadership style was developed by author paul hersey and leadership expert ken blanchard author of the one minute manager the model is not a static leadership style instead it is flexible wherein the manager adapts their management style to various factors in the workplace including their relationship with employees that means managers who live by the model must choose a leadership style related to followers maturity for example if an employee s maturity is high the model suggests the leader provide minimal guidance by contrast if their maturity is low the manager may need to provide explicit directions and supervise work closely to ensure the group has clarity on their goals and how they are expected to achieve them the maturity level of followers is divided into four categories because the hersey blanchard model depends on a leader s decision making skills it uses an individualistic rather than a group approach special considerationshersey and blanchard developed four types of leadership styles based on the tasks and relationships that leaders experience in the workplace according to the model the following are styles of leadership that managers can use this leadership method lets executives managers or people in other positions of authority take charge of their followers based on the acumen understanding and context of the group by considering how the employee s characteristics can affect a project s performance and outcomes leaders can apply an appropriate structure and degree of control to achieve the desired result there are limitations to the model that may be beyond the leader s control the position and authority of the leader may be restricted by the operational chain of command or hierarchy for an organization which could force them to adopt rigid styles rather than adapt to follower maturity time constraints a narrow field of options and limits on available assets can also force managers to act based on their circumstances eliminating the possibility of enacting strategies built around follower maturity advantages and disadvantages of the situational leadership hersey blanchard modelalthough this leadership model may be sound in theory it may not necessarily apply in every situation there are advantages and disadvantages to this approach one advantage of an adaptive leadership style is that leaders can change anytime second employees may find a leader who adapts to shifts in the workforce as a desirable trait it is also a simple and easy to apply leadership style meaning a manager can quickly evaluate a situation and decide as they see fit on the downside situational leadership may put too much responsibility on the manager whose decisions may be flawed additionally the model may not work well in certain work cultures industries or sectors lastly there is a chance that this model might prioritize relationships and tasks instead of a company s long term goals a manager should be mindful of this when using this approach | |
what does the situational leadership hersey blanchard model focus on | the situational leadership hersey blanchard model focuses on adapting your management style to the maturity level of the employees you re addressing | |
what are the 4 domains of hersey and blanchard | the four maturity levels are low moderate low moderate high and high maturity depending on the employee s maturity a manager can choose from four styles of leadership telling selling participating and delegating | |
what is the situational leadership model by hersey and blanchard | situational leadership is adapting your style based on who you manage and assign tasks to and the situation the bottom linethe situational leadership model was proposed by paul hersey and ken blanchard in 1996 as a way to guide leaders to more effective leadership based on situations and people because employees work and mature professionally or not the theory suggests that they may respond better to different levels of guidance supervision and instruction the theory behind the model is to use different approaches with employees based on their abilities willingness to work knowledge and experience | |
what is the heston model | the heston model named after steve heston is a type of stochastic volatility model used to price european options understanding the heston modelthe heston model developed by associate finance professor steven heston in 1993 is an option pricing model that can be used for pricing options on various securities it is comparable to the more popular black scholes option pricing model 1overall option pricing models are used by advanced investors to estimate and gauge the price of a particular option trading on an underlying security in the financial marketplace options just like their underlying security will have prices that change throughout the trading day option pricing models seek to analyze and integrate the variables that cause fluctuation of option prices in order to identify the best option price for investment as a stochastic volatility model the heston model uses statistical methods to calculate and forecast option pricing with the assumption that volatility is arbitrary the assumption that volatility is arbitrary rather than constant is the key factor that makes stochastic volatility models unique other types of stochastic volatility models include the sabr model the chen model and the garch model key differencesthe heston model has characteristics that distinguish it from other stochastic volatility models namely the heston model is also a type of volatility smile model smile refers to the volatility smile a graphical representation of several options with identical expiration dates that show increasing volatility as the options become more in the money itm or out of the money otm the smile model s name derives from the concave shape of the graph which resembles a smile heston model methodologythe heston model is a closed form solution for pricing options that seeks to overcome some of the shortcomings presented in the black scholes option pricing model the heston model is a tool for advanced investors d s t r s t d t v t s t d w 1 t d v t k v t d t v t d w 2 t where s t asset price at time t r risk free interest rate theoretical rate on an asset carrying no risk v t volatility standard deviation of the asset price volatility of the v t long term price variance k rate of reversion to d t indefinitely small positive time increment w 1 t brownian motion of the asset price w 2 t brownian motion of the asset s price variance begin aligned ds t rs tdt sqrt v t s tdw 1t dv t k theta v t dt sigma sqrt v t dw 2t textbf where s t text asset price at time t r text risk free interest rate theoretical rate on an text asset carrying no risk sqrt v t text volatility standard deviation of the asset price sigma text volatility of the sqrt v t theta text long term price variance k text rate of reversion to theta dt text indefinitely small positive time increment w 1t text brownian motion of the asset price w 2t text brownian motion of the asset s price variance end aligned dst rst dt vt st dw1t dvt k vt dt vt dw2t where st asset price at time tr risk free interest rate theoretical rate on anasset carrying no riskvt volatility standard deviation of the asset price volatility of the vt long term price variancek rate of reversion to dt indefinitely small positive time incrementw1t brownian motion of the asset pricew2t brownian motion of the asset s price variance heston model vs black scholesthe black scholes model for option pricing was introduced in the 1970s and served as one of the first models for helping investors derive a price associated with an option on a security in general it helped to promote option investing as it created a model for analyzing the price of options on various securities both the black scholes and heston model are based on underlying calculations that can be coded and programmed through advanced excel or other quantitative systems the black scholes call option formula is calculated by multiplying the stock price by the cumulative standard normal probability distribution function thereafter the net present value npv of the strike price multiplied by the cumulative standard normal distribution is subtracted from the resulting value of the previous calculation in mathematical notation conversely the value of a put option could be calculated using the formula in both formulas s is the stock price k is the strike price r is the risk free interest rate and t is the time to maturity the formula for d1 is the formula for d2 is special considerationsthe heston model is noteworthy because it seeks to provide for one of the main limitations of the black scholes model which holds volatility constant the use of stochastic variables in the heston model provides for the notion that volatility is not constant but arbitrary both the basic black scholes model and the heston model still only provide option pricing estimates for a european option which is an option that can only be exercised on its expiration date various research and models have been studied for pricing american options through both black scholes and the heston model these variations provide estimates for options that can be exercised on any date leading up to the expiration date as is the case for american options | |
what is heterodox economics | heterodox economics is the analysis and study of economic principles considered outside of mainstream or orthodox schools of economic thought schools of heterodox economics vary widely and have few common characteristics other than propounding theories assumptions or methodologies that fall outside of or contradict the mainstream keynesian and neoclassical movements heterodox schools of thought include far left theories such as socialism marxism and post keynesian economics as well as those associated with radical free market economics such as the austrian school heterodox economists often employ research methods and tools that originate in other disciplines such as psychology or physics to economic questions understanding heterodox economicsheterodox economics is an umbrella term that refers to many different branches or approaches to studying economics all of which fall outside of the current mainstream of economic thought there is no specific commonality between these various approaches beyond their disagreement with the mainstream approach and they are often directly opposed to one another in their assumptions research programs and conclusions as much or more so than they are opposed to mainstream economics heterodox economics is also a temporally relative term because what is considered heterodox at one point in time may have previously been the mainstream view in the past or may become adopted and accepted as part of the mainstream orthodoxy in the future for example the classical view that economies are largely self correcting at the macroeconomic level in the same way that microeconomic markets are was the mainstream theory until the 1930 s when it was replaced by the now orthodox keynesian macroeconomic framework heterodox to mainstreampreviously radical heterodox approaches such as behavioral economics have become widely accepted among mainstream economists and policymakers in recent decades indeed many nobel prizes have been awarded over the years for work in economics that at the time of original publication was considered heterodox but eventually became so influential as to merit recognition by the award committee from time to time heterodox ideas may even completely upset the existing mainstream of economic thought in a process described by philosopher of science thomas kuhn as a paradigm shift 1 heterodox ideas by definition fall outside the current scientific paradigm until they don t and then they may replace it entirely the marginal revolution of the 1870s would be considered an example of this type of paradigm shift as it actually led to the establishment of marginalism as the foundation of the current economic mainstream the existence of heterodox economics provides an alternative approach to mainstream economics they can help explain economic phenomena that cannot be satisfactorily explained or may be simply ignored by more orthodox theories until it s too late or until they become too obvious not to ignore any longer examples of heterodox economicsheterodox theories such as the austrian business cycle theory abct and minsky s financial instability hypothesis rose to public prominence during the great recession because they provided powerful explanations and remedies for the u s housing bubble and the resulting global financial crisis which mainstream theories failed to predict and struggled to address although heterodox economics are constantly being redefined by culture some popular heterodox economic theories include feminist economic theories post keynesian and marxist among others the influence of heterodox economicsmost of the time heterodox economic theories are ignored or considered to be interesting but irrelevant curiosities their ideas and assumptions simply do not fit into what most economists are taught in university and may even directly challenge core aspects of mainstream theory and practice although heterodox economics has faced a lot of hostility on the academic side it has actually shifted mainstream economics toward a more integrated approach as some heterodox ideas are eventually adopted into the mainstream heterodox economics can still indirectly improve and extend mainstream economic thinking by challenging it even when the heterodox ideas themselves fail to become accepted having a range of heterodox frameworks with plausible solutions to economic contradictions forces all economists to question the starting assumptions when approaching these questions heterodox economics continually challenges the orthodox school to prove that it really is better in practice not just by tradition other considerationsthere is more pluralism in economics thanks to the competing theories from heterodox approaches though this has also led to more multi disciplinary analyses of economic problems economics has been very focused on market based explanations it may be the best approach for the majority of problems but most people tend to think there is more to the world than market based economics heterodox approaches often emphasize non market aspects of economic phenomena such as social identity cooperative collective action power relations and psychological biases which look outside the field of economics for a deeper understanding they also often seem to fit a regular person s experience in the world and the history of this world better than some of the widely accepted mainstream theories | |
definition of heteroskedastic | heteroskedastic refers to a condition in which the variance of the residual term or error term in a regression model varies widely if this is true it may vary in a systematic way and there may be some factor that can explain this if so then the model may be poorly defined and should be modified so that this systematic variance is explained by one or more additional predictor variables the opposite of heteroskedastic is homoskedastic homoskedasticity refers to a condition in which the variance of the residual term is constant or nearly so homoskedasticity also spelled homoscedasticity is one assumption of linear regression modeling homoskedasticity suggests that the regression model may be well defined meaning that it provides a good explanation of the performance of the dependent variable breaking down heteroskedasticheteroskedasticity is an important concept in regression modeling and in the investment world regression models are used to explain the performance of securities and investment portfolios the most well known of these is the capital asset pricing model capm which explains the performance of a stock in terms of its volatility relative to the market as a whole extensions of this model have added other predictor variables such as size momentum quality and style value vs growth these predictor variables have been added because they explain or account for variance in the dependent variable portfolio performance then is explained by capm for example developers of the capm model were aware that their model failed to explain an interesting anomaly high quality stocks which were less volatile than low quality stocks tended to perform better than the capm model predicted capm says that higher risk stocks should outperform lower risk stocks in other words high volatility stocks should beat lower volatility stocks but high quality stocks which are less volatile tended to perform better than predicted by capm later other researchers extended the capm model which had already been extended to include other predictor variables such as size style and momentum to include quality as an additional predictor variable also known as a factor with this factor now included in the model the performance anomaly of low volatility stocks was accounted for these models known as multi factor models form the basis of factor investing and smart beta | |
definition of heteroskedastic | heteroskedastic refers to a condition in which the variance of the residual term or error term in a regression model varies widely if this is true it may vary in a systematic way and there may be some factor that can explain this if so then the model may be poorly defined and should be modified so that this systematic variance is explained by one or more additional predictor variables the opposite of heteroskedastic is homoskedastic homoskedasticity refers to a condition in which the variance of the residual term is constant or nearly so homoskedasticity also spelled homoscedasticity is one assumption of linear regression modeling homoskedasticity suggests that the regression model may be well defined meaning that it provides a good explanation of the performance of the dependent variable breaking down heteroskedasticheteroskedasticity is an important concept in regression modeling and in the investment world regression models are used to explain the performance of securities and investment portfolios the most well known of these is the capital asset pricing model capm which explains the performance of a stock in terms of its volatility relative to the market as a whole extensions of this model have added other predictor variables such as size momentum quality and style value vs growth these predictor variables have been added because they explain or account for variance in the dependent variable portfolio performance then is explained by capm for example developers of the capm model were aware that their model failed to explain an interesting anomaly high quality stocks which were less volatile than low quality stocks tended to perform better than the capm model predicted capm says that higher risk stocks should outperform lower risk stocks in other words high volatility stocks should beat lower volatility stocks but high quality stocks which are less volatile tended to perform better than predicted by capm later other researchers extended the capm model which had already been extended to include other predictor variables such as size style and momentum to include quality as an additional predictor variable also known as a factor with this factor now included in the model the performance anomaly of low volatility stocks was accounted for these models known as multi factor models form the basis of factor investing and smart beta | |
what are heuristics | heuristics are mental shortcuts that help people make quick decisions they are rules or methods that help people use reason and past experience to solve problems efficiently commonly used to simplify problems and avoid cognitive overload heuristics are part of how the human brain evolved and is wired allowing individuals to quickly reach reasonable conclusions or solutions to complex problems these solutions may not be optimal ones but are often sufficient given limited timeframes and calculative capacity these cognitive shortcuts feature prominently in behavioral economics investopedia danie drankwalterunderstanding heuristicspeople employ heuristics naturally due to the evolution of the human brain the brain can only process so much information at once and therefore must employ various shortcuts or practical rules of thumb we would not get very far if we had to stop to think about every little detail or collect every piece of available information and integrate it into an analysis heuristics therefore facilitate timely decisions that may not be the absolute best ones but are appropriate enough individuals are constantly using this sort of intelligent guesswork trial and error process of elimination and past experience to solve problems or chart a course of action in a world that is increasingly complex and overloaded with big data heuristic methods make decision making simpler and faster through shortcuts and good enough calculations first identified in economics by the political scientist and organizational scholar herbert simon in his work on bounded rationality heuristics have now become a cornerstone of behavioral economics rather than subscribing to the idea that economic behavior was rational and based upon all available information to secure the best possible outcome for an individual optimizing simon believed decision making was about achieving outcomes that were good enough for the individual based on their limited information and balancing the interests of others simon called this satisficing a portmanteau of the words satisfy and suffice 1advantages and disadvantages of using heuristicsthe main advantage to using heuristics is that they allow people to make good enough decisions without having all of the information and without having to undertake complex calculations because humans cannot possibly obtain or process all the information needed to make fully rational decisions they instead seek to use the information they do have to produce a satisfactory result or one that is good enough heuristics allow people to go beyond their cognitive limits heuristics are also advantageous when speed or timeliness matters for example deciding to enter a trade or making a snap judgment about some important decision heuristics are thus handy when there is no time to carefully weigh all options and their merits there are also drawbacks to using heuristics while they may be quick and dirty they will likely not produce the optimal decision and can also be wrong entirely quick decisions without all the information can lead to errors in judgment and miscalculations can lead to mistakes moreover heuristics leave us prone to biases that tend to lead us toward irrational economic behavior and sway our understanding of the world such heuristics have been identified and cataloged by the field of behavioral economics quick easyallows decision making that goes beyond our cognitive capacityallows for snap judgments when time is limitedoften inaccuratecan lead to systemic biases or errors in judgmentexample of heuristics in behavioral economicsa popular shortcut method in problem solving identified in behavioral economics is called representativeness heuristics representativeness uses mental shortcuts to make decisions based on past events or traits that are representative of or similar to the current situation say for example fast food abc expanded its operations to india and its stock price soared an analyst noted that india is a profitable venture for all fast food chains therefore when fast food xyz announced its plan to explore the indian market the following year the analyst wasted no time in giving xyz a buy recommendation although their shortcut approach saved reviewing data for both companies it may not have been the best decision fast food xyz may have food that is not appealing to indian consumers which research would have revealed anchoring and adjustment is another prevalent heuristic approach with anchoring and adjustment a person begins with a specific target number or value called the anchor and subsequently adjusts that number until an acceptable value is reached over time the major problem with this method is that if the value of the initial anchor is not the true value then all subsequent adjustments will be systematically biased toward the anchor and away from the true value an example of anchoring and adjustment is a car salesman beginning negotiations with a very high price that is arguably well above the fair value because the high price is an anchor the final price will tend to be higher than if the car salesman had offered a fair or low price to start the availability or recency heuristic is an issue where people give too much weight to the probability of an event happening again if it recently has occurred for instance if a shark attack is reported in the news those headlines make the event salient and can lead people to stay away from the water even though shark attacks remain very rare another example is the case of the hot hand or the sense that following a string of successes an individual is likely to continue being successful whether at the casino in the markets or playing basketball the hot hand has been debunked a string of recent good luck does not alter the overall probability of events occurring confirmation bias is a well documented heuristic whereby people give more weight to information that fits with their existing worldviews or beliefs at the same time information that contradicts these beliefs is discounted or rejected investors should be aware of their own tendency toward confirmation bias so that they can overcome poor decision making missing chances and avoid falling prey to bubbles seeking out contrarian views and avoiding affirmative questions are two ways to counteract confirmation bias hindsight is always 20 20 however the hindsight bias leads us to forget that we made incorrect predictions or estimates prior to them occurring rather we become convinced that we had accurately predicted an event before it occurred even when we did not this can lead to overconfidence for making future predictions or regret for not taking past opportunities stereotypes are a kind of heuristic that allows us to form opinions or judgments about people whom we have never met in particular stereotyping takes group level characteristics about certain social groups often ones that are racist sexist or otherwise discriminatory and casts those characteristics onto all of the members in that group regardless of their individual personalities beliefs skills or behaviors by imposing oversimplified beliefs onto people we can quickly judge potential interactions with them or individual outcomes of those people however these judgments are often plain wrong derogatory and perpetuate social divisions and exclusions heuristics and psychologyheuristics were first identified and taken seriously by scholars in the middle of the 20th century with the work of herbert simon who asked why individuals and firms don t act like rational actors in the real world even with market pressures punishing irrational decisions simon found that corporate managers do not usually optimize but instead rely on a set of heuristics or shortcuts to get the job done in a way that is good enough to satisfice later in the 1970s and 80s psychologists amos tversky and daniel kahneman working at the hebrew university in jerusalem built off of herbert simon s work and developed what is known as prospect theory a cornerstone of behavioral economics prospect theory catalogs several heuristics used subconsciously by people as they make financial evaluations 2one major finding is that people are loss averse that losses loom larger than gains i e the pain of losing 50 is far more than the pleasure of receiving 50 here people adopt a heuristic to avoid realizing losses sometimes spurring them to take excessive risks in order to do so but often leading to even larger losses more recently behavioral economists have tried to develop policy measures or nudges to help correct people s irrational use of heuristics in order to help them achieve more optimal outcomes for instance by having people enroll in a retirement savings plan by default instead of having to opt in | |
what are the types of heuristics | to date several heuristics have been identified by behavioral economics or else developed to aid people in making otherwise complex decisions in behavioral economics representativeness anchoring and adjustment and availability recency are among the most widely cited heuristics may be categorized in many ways such as cognitive versus emotional biases or errors in judgment versus errors in calculation | |
what is heuristic thinking | heuristic thinking uses mental shortcuts often unconsciously to quickly and efficiently make otherwise complex decisions or judgments these can be in the form of a rule of thumb e g saving 5 of your income in order to have a comfortable retirement or cognitive processes that we are largely unaware of like the availability bias | |
what is another word for heuristic | heuristic may also go by the following terms rule of thumb mental shortcut educated guess or satisfice | |
how does a heuristic differ from an algorithm | an algorithm is a step by step set of instructions that are followed to achieve some goal or outcome often optimizing that outcome they are formalized and can be expressed as a formula or recipe as such they are reproducible in the sense that an algorithm will always provide the same output given the same input a heuristic amounts to an educated guess or gut feeling rather than following a set of rules or instructions a heuristic is a mental shortcut moreover it often produces sub optimal and even irrational outcomes that may differ even when given the same input | |
what are computer heuristics | in computer science a heuristic refers to a method of solving a problem that proves to be quicker or more efficient than traditional methods this may involve using approximations rather than precise calculations or techniques that circumvent otherwise computationally intensive routines the bottom lineheuristics are practical rules of thumb that manifest as mental shortcuts in judgment and decision making without heuristics our brains would not be able to function given the complexity of the world the amount of data to process and the calculative abilities required to form an optimal decision instead heuristics allow us to make quick good enough choices however these choices may also be subject to inaccuracies and systemic biases such as those identified by behavioral economics | |
what are hidden taxes | hidden taxes are taxes indirectly assessed on consumer goods without the explicitly knowledge of consumers who purchase the product at the heart of the concept of a hidden tax is the notion that if you cannot see it your purchasing behavior will be largely unchanged with the advent of modern transactional systems visibility into a variety of hidden taxes ranging from highway tolls paid using automatic transponders to music downloads is becoming more obscured breaking down hidden taxeshidden taxes are everywhere lurking mostly unseen while effectively raising the prices of many ordinary goods we consume in our daily lives most everyone is aware that a sales tax applies when they purchase goods in most states but not many consumers fully grasp the extent to which hidden taxes are included in the final price of many products the goal of hidden taxes is to stay hidden but one of the most visible of these types of taxation is the one added to cable bills cable companies and cell phone service providers are required to include all charges on their statements but not many consumers actually read all the pages detailing the fees and taxes the goal of this approach to taxes is to add revenue to the government without negatively impacting product demand through higher consumer prices it is a balancing act other examples of hidden taxes include taxes on cigarettes alcohol gambling gasoline and hotel rooms these taxes are typically collected as part of an ordinary transaction which serves to bury them in the final price a price that is higher than it would be without the hidden tax other examples include duties imposed upon products imported from overseas tariffs added during global trade wars have been linked to serious economic downturns including the great depression tariffs are a new cost that the manufacturer has no choice but to pay if they want to continue shipping their goods overseas given the interconnectedness of our modern global economy most suppliers cannot afford to lose international market share so they bury the new costs into the product cost hoping demand is not adversely slowed these increases pass along through wholesalers and distributors who have their own margin requirements making their way to the final consumer pro and cons of hidden taxesno one wants to pay more in taxes yet there is an ongoing debate about whether taxing those who use sin products is fair given they are in aggregate drawing upon social services more than those who do not consume those products examples include cigarettes alcohol and gambling one side of this argument believes that by making these products very expensive through hidden taxes consumption will decline ironically one would think in order for a tax to affect consumer behavior the consumer needs to be able to see it which is not so easily done with hidden taxes the other side of the argument says we live in a free society where people should be able to pay a fair price for whatever they want compounding matters in the case of known addictive products like cigarettes consumer behavior is less likely to be modified by higher prices technology is making it much easier to include hidden taxes with the advent of facial and finger recognition on smartphones consumers can now make a purchase in seconds without much effort and without closely reviewing the presence of any hidden taxes or fees another example of this can be seen on our highways with the rise of automated tolls | |
what are hidden values | hidden values are assets that are undervalued on a company s balance sheet and therefore may not be incorporated into or reflected in the company s share price so called value investors seek to uncover hidden values on a company s balance sheet that are often overlooked by the average investor often through the use of fundamental analysis an asset that is marked at book value but actually worth more in terms of its fair market price would be considered a hidden value understanding hidden valuethe essence of value investing is buying undervalued securities that is undervalued relative to their intrinsic values a value investor will determine a fair value in any number of ways depending on the type of company and then compare this intrinsic value to the value accorded to the security by the market if the discount is attractive enough for this value investor they will buy the shares and patiently await the potential convergence of the current market value to the intrinsic value an asset that is assigned by a company a certain value on the balance sheet to conform to generally accepted accounting principles gaap may be worth more in terms of fair market value intangible assets such as trademarks and patents could contain hidden values as could reserves of natural resource companies in some cases if an asset has long been held at a cost basis on the books it could be worth substantially more than what is reflected on the balance sheet likewise if an asset has been depreciated for accounting purposes especially when using an accelerated depreciation schedule it may actually hold more market value than it is attributed to have on the firm s balance sheet example of hidden valuea classic example of a hidden value is land land must be held at historic cost according to gaap accounting rules but there is a high likelihood that this kind of asset has significantly appreciated in value if owned for a long period of time if the land is isolated from the balance sheet and valued at current market prices it would probably have a value greater than what is recorded in the financial statements and perhaps comprise a non insignificant portion of the company s market capitalization a retailer such as tiffany or macy s with prime property in manhattan for instance could possess this type of hidden value the value investor would separately calculate the current market value of their properties in the determination of whether or how much of a discount to intrinsic value exists | |
what is a hierarchical deterministic hd wallet | a hierarchical deterministic hd wallet is a digital wallet commonly used to store the digital keys for holders of cryptocurrencies such as bitcoin and ethereum anyone with a copy of both the public and password like private key can control the cryptocurrency in the account understanding hierarchical deterministic hd walletsin the cryptocurrency world wallets contain keys instead of coins a cryptocurrency wallet has two keys a public key or address which acts much like an account number and a private key that the holder uses to transfer funds to other accounts the private key is much like a password someone transferring bitcoin from their account for example would use their private key to authorize the transaction this combination of public and private keys is designed to ensure security from hackers as well as anonymity in transactions because the pair of keys enables the transfer of someone s cryptocurrency it is critical that the private key remains safe to this end the keys are generated randomly each key must be backed up in the wallet to prevent it and the funds it is linked to from becoming irrevocably lost to the owner but to ensure privacy one of the purposes driving the creation of bitcoin and other cryptocurrencies and limit the use of public keys to one transaction each a new pair of keys would need to be created for each transaction this can get difficult to manage over time deterministic wallets were created to offer a solution one in which all keys can be traced back to an original random seed usually a set of random words and a hash function with a deterministic wallet the original seed is enough to recover all private and public keys therefore requiring only a single backup at the time of creation deterministic vs hierarchical deterministic walletshd wallets are the most advanced type of deterministic wallet they contain keys in a tree structure in which parent keys can produce children keys which can produce grandchildren keys and so on infinitely the cryptocurrency holder can use the tree structure to organize transactions by type of transaction or by entity involved such as departments or subsidiaries like simple deterministic wallets all hd wallets are created from a single master root seed usually represented by a mnemonic word sequence which makes it easier for account holders to transcribe and store but hd wallets also offer the option of creating public keys without having to access the corresponding private keys this means they can be used on insecure servers or in a receive only mode | |
the hierarchy of effects theory is a model of how advertising influences a consumer s decision to purchase or not purchase a product or service the hierarchy represents the progression of learning and decision making consumer experiences as a result of advertising a hierarchy of effects model is used to set up a structured series of advertising message objectives for a particular product to build upon each successive objective until a sale is ultimately made the objectives of a campaign are in order of delivery awareness knowledge liking preference conviction and purchase | breaking down hierarchy of effects theorythe hierarchy of effects theory is an advanced advertising strategy in that it approaches the sale of a good through well developed persuasive advertising messages designed to build brand awareness over time while an immediate purchase would be preferred companies using this strategy expect consumers to need a longer decision making process the goal of advertisers is to guide a potential customer through all six stages of the hierarchy the behaviors associated with the hierarchy of effects theory can be boiled down to think feel and do or cognitive affective and conative behaviors the hierarchy of effects model was created by robert j lavidge and gary a steiner in their 1961 article a model for predictive measurements of advertising effectiveness 1hierarchy of effects theory stagesthe awareness and knowledge or cognitive stages are when a consumer is informed about a product or service and how they process the information they have been given for advertisers it is essential to key brand information in this cognitive stage the information is given in a useful and easily understood fashion that compels the prospective customer to learn more and make a connection with a product the liking and preference or affective stages are when customers form feelings about a brand the affective phase is not a time when an advertiser should focus on the product its positive attributes or its technical abilities instead advertisers should attempt to appeal to a consumer s values emotions self esteem or lifestyle the conviction and purchase or conative stages focus on actions during the conative stage the advertiser attempts to compel a potential customer to act on the information they have learned and the emotional connection they have formed with a brand by completing a purchase it may involve the conversion of doubts about a product or service into an action in these stages advertisers should attempt to convince potential customers that they need a product or service possibly by offering a test drive or sample item advertisers should also build a level of trust with them by focusing on the quality usefulness and popularity of a product or service | |
what is the hierarchy of gaap | the hierarchy of generally accepted accounting principles gaap refers to a four level framework that classifies the financial accounting standards board fasb the u s securities and exchange commission sec and the american institute of certified public accountants aicpa guidance on accounting practices and standards by their level of authority top level guidance typically addresses broad accounting issues while those at a lower level deal with more technical issues understanding the hierarchy of gaapwith multiple regulatory bodies overseeing various parts of the accounting profession there was a need to pinpoint the most relevant and authoritative guidance on accounting topics additionally each regulatory body releases accounting guidance in multiple formats that have varying levels of authority the hierarchy of gaap is designed to improve consistency and comparability within financial reporting it is a framework for selecting the principles that accountants should use in preparing financial statements of nongovernmental entities in conformity with u s gaap the fasb formed in 1973 is an independent nonprofit organization that is responsible for establishing accounting and financial reporting standards for public and private companies and nonprofit organizations in the united states this allows for more standardized reporting enabling investors and other financial statement users to better compare the financial statements of multiple companies within a common sector or industry the sec created in 1934 is an independent federal government agency responsible for protecting investors maintaining fair and orderly functioning of the securities markets and facilitating capital formation the sec sets forth reporting standards and regulations for public companies the aicpa founded in 1887 is the non profit professional organization that represents certified public accountants cpas in the united states among other tasks the aicpa develops standards for external audits of private companies requirements for the hierarchy of gaapthere are four levels of the gaap hierarchy the top of the hierarchy is the most authoritative guidance an accountant researching a given topic should consult first with the highest level for relevant advice if no information on the topic is given at the higher levels the accountant should look to the next level for relevant pronouncements the fasb s statement of accounting standards no 162 provides a detailed explanation of the hierarchy | |
what is a high beta index | a high beta index is a basket of stocks that exhibits greater volatility than a broad market index such as the s p 500 index the s p 500 high beta index is the most well known of these indexes it tracks the performance of 100 companies in the s p 500 that are the most sensitive to changes in market returns 1 beta is the amount of volatility or systematic risk an asset exhibits compared to the market as a whole besides the flagship large cap index standard and poor s offers a number of high beta variations for small cap mid cap and other market indexes high beta index explainedhigh beta index companies exhibit greater sensitivity than the broader market sensitivity is measured by the beta of an individual stock a beta of 1 indicates the asset moves in line with the market anything less than 1 represents an asset less volatile than the market while greater than 1 suggests a more volatile asset for example a beta of 1 2 means the asset is 20 more volatile than the market conversely a beta of 0 70 is theoretically 30 less volatile than the market beta is measured against a widely followed index such as the s p 500 index gaining exposure to a high beta index requires an investment vehicle such as an exchange traded fund etf the invesco s p 500 high beta etf sphb is a widely traded asset that tracks volatile assets in the broader market the etf has underperformed the underlying s p 500 index since its inception 2 financial companies constitute nearly 30 of the fund s assets with discover financial services dfs lincoln national corp lnc and invesco ivz among its largest holdings 3 limitations of a high beta indexcontrary to popular belief high beta or volatility doesn t necessarily translate into greater returns for many years the high beta s p 500 index has underperformed its underlying benchmark 4 this occurred during a period of unyielding improvement in the broader market instead research shows that low volatility stocks tend to earn greater risk adjusted returns than high volatility stocks the reason low beta tends to outperform can be attributed to investment behavioral biases such as the representative heuristic and overconfidence in addition sector selection and other fundamental criteria play an important role in the volatility and performance of a high beta index | |
what is a high close | a high close is a trading strategy that stock manipulators use that entails making small trades at high prices during the final minutes of trading so as to give the impression that the stock performed really well understanding a high closea high close occurs at the end of a trading session in the financial markets the closing price is the price of the final trade before the close of the trading session these prices are used to create traditional line stock charts they are also used to calculate moving averages since closing prices are widely followed they can be manipulated by traders to produce the appearance of a rally in a stock this practice known as a high close is especially prevalent with micro cap stocks that have limited liquidity since less dollar volume is needed to move the price higher closing prices can also inflate the price of stock derivatives that might form the basis of that derivative similarly mutual fund net asset values are also calculated using closing prices most of the manipulation that occurs through high closing happens at the end of a month or quarter stocks with low levels of liquidity and a high level of information asymmetry are especially susceptible to manipulation special considerationsa 2000 report called high closing by joel fried an economist at the university of western ontario stated that there was no material economic consequence to a high close as long as there were several investors who acted meaning traded the stock based on fundamentals 1 traders should be wary of using closing prices as a gauge of micro and small cap stock successes and look at candlestick charts and other indicators for added insight given that closing prices are watched by most serious investors stock manipulators hope to create a buzz on a particular stock in order to attract investors high close and stock manipulationsstock manipulation is the act of artificially inflating or deflating the price of a security a practice that includes the high close these manipulations are a form of illegal trading that results in personal gain 2 while illegal regulators often find these manipulations hard to detect the manipulator generally sticks with the stocks of smaller companies as it s much easier to manipulate their share prices penny stocks offer more frequent targets compared to medium and large cap firms which are more closely scrutinized by analysts stock manipulation is also called price manipulation market manipulation or is simply referred to as manipulation in addition to the high close other kinds of manipulations include the pump and dump the most frequently used manipulation which artificially inflates a micro cap stock and then sells out leaving later followers to hold the bag there is also the poop and scoop the inverse of the pump and dump which may be less common because it is much more difficult to besmirch the reputation of a solid company with a good reputation than to inflate the reputation of an unknown company high closing is a form of stock manipulation and it can run afoul of regulators if abused example of a high closesuppose company abc s stock price trades at 0 30 at the start of a trading day for the last ten weeks its closing price has been 0 32 trader xyz takes a position in the firm betting that its price will jump to 1 in the coming weeks in the final minutes of closing for the stock market xyz purchases large quantities of abc s stock because abc already has limited liquidity the trader s action has the effect of pumping up its price to 0 60 abc s stock price has skyrocketed by 100 percent and other traders in micro cap stocks pile into abc after observing the price action the next day xyz sells abc in the market before purchasing it back again at the end of the day xyz repeats the high close for two successive days more traders purchase abc and after two days abc s price breezes past 1 misuse of a high closein 2014 the sec charged high frequency trading firm athena capital research with placing a large number of aggressive rapid fire trades in the final two seconds of almost every trading day during a six month period to manipulate the closing prices of thousands of nasdaq listed stocks 3 the trades occurred between june and december 2009 and athena s intent was to boost available liquidity for these stocks and push their prices up to benefit its position in these stocks to accomplish its goal athena used an algorithm gravy that bought and sold orders for the stock gravy made up more than 70 percent of the total trading volume for these stocks during the final seconds of trading at nasdaq starting june 2009 and continuing till december of that year athena ended up paying 1 million as a penalty to settle the charges 3 |
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