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is the loan to deposit ratio a liquidity ratio | yes the loan to deposit ratio ldr is a type of liquidity ratio it assesses a bank s total loans in relation to its total deposits the ratio indicates the ability of the bank to meet its obligations payments to depositors a liquid bank would not have issues in meeting its obligations | |
what are the benefits of a high loan to deposit ratio | a high loan to deposit ratio ldr indicates that a bank has made a large amount of loans when compared to its deposits this is a sign of increased risk and reduced liquidity the benefit however is that the more loans made the more interest the bank earns which increases revenues | |
what is a risky loan to deposit ratio | market practices would indicate that a loan to deposit ratio ldr that is above 80 is risky this signals that a bank has low liquidity and could have difficulty paying its depositors their funds the bottom linethe loan to deposit ratio ldr helps assess a bank s liquidity by comparing its total loans to its total deposits this provides insight into how much risk a bank has taken on and if it would be able to meet its liquidity requirements pay depositors in a market crunch too high of an ldr indicates a bank may have difficulty meeting its obligations while too low of an ldr would indicate a bank is not using its deposits efficiently | |
what is the loan to value ltv ratio | the loan to value ltv ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage typically loan assessments with high ltv ratios are considered higher risk loans therefore if the mortgage is approved the loan has a higher interest rate additionally a loan with a high ltv ratio may require the borrower to purchase mortgage insurance to offset the risk to the lender this type of insurance is called private mortgage insurance pmi | |
how to calculate the loan to value ratio | interested homebuyers can easily calculate the ltv ratio of a home this is the formula l t v r a t i o m a a p v where m a mortgage amount a p v appraised property value begin aligned ltv ratio frac ma apv textbf where ma text mortgage amount apv text appraised property value end aligned ltvratio apvma where ma mortgage amountapv appraised property value an ltv ratio is calculated by dividing the amount borrowed by the appraised value of the property expressed as a percentage for example if you buy a home appraised at 100 000 for its appraised value and make a 10 000 down payment you will borrow 90 000 this results in an ltv ratio of 90 i e 90 000 100 000 understanding the loan to value ltv ratiodetermining an ltv ratio is a critical component of mortgage underwriting it may be used in the process of buying a home refinancing a current mortgage into a new loan or borrowing against accumulated equity within a property lenders assess the ltv ratio to determine the level of exposure to risk they take on when underwriting a mortgage when borrowers request a loan for an amount that is at or near the appraised value and therefore has a higher ltv ratio lenders perceive that there is a greater chance of the loan going into default this is because there is very little equity built up within the property as a result in the event of a foreclosure the lender may find it difficult to sell the home for enough to cover the outstanding mortgage balance and still make a profit from the transaction the main factors that impact ltv ratios are the amount of the down payment sales price and the appraised value of a property the lowest ltv ratio is achieved with a higher down payment and a lower sales price | |
how ltv is used by lenders | a ltv ratio is only one factor in determining eligibility for securing a mortgage a home equity loan or a line of credit however it can play a substantial role in the interest rate that a borrower is able to secure most lenders offer mortgage and home equity applicants the lowest possible interest rate when their ltv ratio is at or below 80 1a higher ltv ratio does not exclude borrowers from being approved for a mortgage although the interest on the loan may rise as the ltv ratio increases for example a borrower with an ltv ratio of 95 may be approved for a mortgage however their interest rate may be a full percentage point higher than the interest rate given to a borrower with an ltv ratio of 75 if the ltv ratio is higher than 80 a borrower may be required to purchase private mortgage insurance pmi this can add anywhere from 0 5 to 1 to the total amount of the loan on an annual basis for example pmi with a rate of 1 on a 100 000 loan would add an additional 1 000 to the total amount paid per year or 83 33 per month pmi payments are required until the ltv ratio is 80 or lower the ltv ratio will decrease as you pay down your loan and as the value of your home increases over time in general the lower the ltv ratio the greater the chance that the loan will be approved and the lower the interest rate is likely to be in addition as a borrower it s less likely that you will be required to purchase private mortgage insurance pmi while it is not a law that lenders require an 80 ltv ratio in order for borrowers to avoid the additional cost of pmi it is the practice of nearly all lenders exceptions to this requirement are sometimes made for borrowers who have a high income lower debt or have a large investment portfolio as a rule of thumb a good loan to value ratio should be no greater than 80 anything above 80 is considered to be a high ltv which means that borrowers may face higher borrowing costs require private mortgage insurance or be denied a loan ltvs above 95 are often considered unacceptable mortgage example of ltvfor example suppose you buy a home that appraises for 100 000 however the owner is willing to sell it for 90 000 if you make a 10 000 down payment your loan is for 80 000 which results in an ltv ratio of 80 i e 80 000 100 000 if you were to increase the amount of your down payment to 15 000 your mortgage loan is now 75 000 this would make your ltv ratio 75 i e 75 000 100 000 variations on ltv ratio rulesdifferent loan types may have different rules when it comes to ltv ratio requirements fha loans are mortgages designed for low to moderate income borrowers they are issued by an fha approved lender and insured by the federal housing administration fha fha loans require a lower minimum down payment and credit scores than many conventional loans fha loans allow an initial ltv ratio of up to 96 5 but they require a mortgage insurance premium mip that lasts for as long as you have that loan no matter how low the ltv ratio eventually goes 2many people decide to refinance their fha loans once their ltv ratio reaches 80 in order to eliminate the mip requirement va and usda loans available to current and former military or those in rural areas do not require private mortgage insurance even though the ltv ratio can be as high as 100 34 however both va and usda loans do have additional fees fannie mae s homeready and freddie mac s home possible mortgage programs for low income borrowers allow an ltv ratio of 97 however they require mortgage insurance until the ratio falls to 80 56for fha va and usda loans there are streamlined refinancing options available these waive appraisal requirements so the home s ltv ratio doesn t affect the loan for borrowers with an ltv ratio over 100 also known as being underwater or upside down fannie mae s high loan to value refinance option and freddie mac s enhanced relief refinance are also available options 7upfront fees on fannie mae and freddie mac home loans changed in may 2023 fees were increased for homebuyers with higher credit scores such as 740 or higher while they were decreased for homebuyers with lower credit scores such as those below 640 another change your down payment will influence what your fee is the higher your down payment the lower your fees though it will still depend on your credit score fannie mae provides the loan level price adjustments on its website 8ltv vs combined ltv cltv while the ltv ratio looks at the impact of a single mortgage loan when purchasing a property the combined loan to value cltv ratio is the ratio of all secured loans on a property to the value of a property this includes not only the primary mortgage used in ltv but also any second mortgages home equity loans or lines of credit or other liens lenders use the cltv ratio to determine a prospective home buyer s risk of default when more than one loan is used for example if they will have two or more mortgages or a mortgage plus a home equity loan or line of credit heloc in general lenders are willing to lend at cltv ratios of 80 and above and to borrowers with high credit ratings primary lenders tend to be more generous with cltv requirements since it is a more thorough measure let s look a little closer at the difference the ltv ratio only considers the primary mortgage balance on a home therefore if the primary mortgage balance is 100 000 and the home value is 200 000 ltv 50 consider however the example if it also has a second mortgage in the amount of 30 000 and a heloc of 20 000 the combined loan to value now becomes 100 000 30 000 20 000 200 000 75 a much higher ratio these combined considerations are especially important if the mortgagee defaults and goes into foreclosure | |
what is a good ltv | most lenders use 80 as the threshold for a good loan to value ltv ratio anything below this value is even better note that borrowing costs can become higher or borrowers may be denied loans as the ltv rises above 80 | |
what are disadvantages of loan to value | the main drawback of the information that a ltv provides is that it only includes the primary mortgage that a homeowner owes and does not include in its calculations other obligations of the borrower such as a second mortgage or home equity loan therefore the cltv is a more inclusive measure of a borrower s ability to repay a home loan | |
what does a 70 ltv mean | a 70 0 70 loan to value ltv ratio indicates that the amount borrowed is equal to seventy percent of the value of the asset in the case of a mortgage it would mean that the borrower has come up with a 30 down payment and is financing the rest for instance a 500 000 property with a 70 ltv would have a 150 000 down payment and a 350 000 mortgage | |
how is ltv calculated | loan to value ltv is calculated simply by taking the loan amount and dividing it by the value of the asset or collateral being borrowed against in the case of a mortgage this would be the mortgage amount divided by the property s value the bottom linea loan to value ratio typically represents the amount of a mortgage compared to the property s value an 80 ltv for example would mean a mortgage equal to 80 of the property s value borrowers often can get better terms on their mortgages with lower ltvs because they require higher down payments the more money borrowers can put down the less likely it becomes that they will be a risk in the eyes of lenders mortgages with ltvs higher than 80 usually require private mortgage insurance which adds an additional cost to monthly payments | |
what is a lobby | the term lobby refers to a group of people who band together and try to influence politicians and other individuals in public office a lobby is typically formed to influence government officials to act in a way that is beneficial to the lobby s or an industry s best interests either through favorable legislation or by blocking unfavorable measures the term is also used as a verb to describe the influence that a group of individuals exerts over other people | |
how lobbies work | the term lobby came into use in the american political landscape in the 1800s in u s statehouses in the northeast the very first lobby in the united states congress was the room outside the chamber which was one of the easiest places to run into house representatives this was generally where people were able to meet with politicians have their say and try to persuade them to vote a certain way 1the term s meaning began to shift as people gave up meeting in this physical lobby as mentioned above a lobby is a group of individuals or companies that use their influence over public officials it also means the action of trying to exert influence over other individuals lobbyists are particularly active and well funded by certain industries notably pharmaceuticals oil and gas insurance aerospace and defense utilities banks and real estate lobbies and lobbyists are paid substantially by their clients to sway the decisions of lawmakers to pass legislation for the industries they serve lobbies are often seen negatively because of the influence they exert and the amount of power they hold that s why they can circumvent the democratic process and conduct what most people call back office deals it may not seem fair to the average citizen that an interest group can seemingly buy a vote but that is how it works in politics despite anti lobbying rhetoric spewed by many candidates on the campaign trail the candidate if elected into office does little or nothing to put an end to special interest money in fact these politicians often expose themselves as hypocrites when they accept donations from lobbies although they are generally looked down upon some lobbies can have a positive impact on society such as those tied to environmental groups education and human rights special considerationslobbyists who walk around washington d c and state capitals may serve a positive role in illuminating or clarifying issues that are germane to industries or professions but they are generally viewed pejoratively as special interest groups practical minded people should note that competing interests in a democratic process are natural where lines may be drawn however are in cases that are considered harmful to society by a majority of americans for instance there is a debate about whether guns and tobacco fit into this category the same goes for processed foods sugary drinks and expensive drugs some do not like the lobbies that push their agendas also if a lobby simply outspends a competing interest to get what it wants the question of fairness arises there are lobbies on the other hand that are seen as positive where the public good is concerned some of them are even considered essential these lobbies are tied to environmental groups education and human rights to name a few these lobbies may not be as well funded as the industries and interest groups that oppose them but at least they have a voice many citizens liken the actions of lobbies to bribery because they may promise politicians financial support and backing during their political campaigns in exchange for votes on legislation types of lobbyinglobbying can take on a few different forms the two most common are example of a lobbythe national rifle association is one of the most well known lobbies in the united states the organization was founded in 1871 the organization had roots in the promotion of shooting sports and hunting over time it expanded and became an advocacy group for gun owners around the country 2the nra calls itself a major political force whose effectiveness is due to several factors including the organization committed about 1 59 million to its lobbying efforts in 2022 4 | |
what is a local tax | a local tax is an assessment by a state county or municipality to fund public services ranging from schools and highways to garbage collection and sewer maintenance local taxes come in many forms from property taxes and payroll taxes to sales taxes and licensing fees they vary widely from one jurisdiction to the next taxes levied by cities and towns are also referred to as municipal taxes understanding local taxesthe u s constitution gives the federal government the authority and the states the right to impose taxes on their residents 12local taxes fund services including police and fire departments education and health services libraries road maintenance and other programs and projects that benefit the community at large many of these services offset some of these costs with federal funds in the form of grants unlike federal taxes the benefits arising from local taxes are generally apparent at the community level municipalities face a constant balancing act on tax policy since high taxes meet with resistance while low taxes require cutbacks in essential services among the common types of taxes that many states impose are personal income tax corporate income tax estate tax fuel tax and sales tax types of local taxesthe largest single tax bill that is received by homeowners is the local residential property tax this is generally based on the assessed value of the home each state establishes the guidelines under which local governments can impose property taxes states and cities that impose an income tax on their residents withhold the tax from employee wages local wage taxes are relatively rare only 16 states permit them in addition municipalities in some states like ohio impose local levies known as school district taxes to help fund the costs of education these costs are folded into the local property tax in most jurisdictions 3a sales tax may be imposed on goods and services sold to residents of a state a municipality may add to that for example new york city charges an 8 875 combined state and city sales tax on many products and services of that 4 is the state tax 4the sales tax is known as a regressive tax rather than a progressive tax because every customer pays the same percentage regardless of income education public safety and road maintenance are among the priorities of local governments all but five states have sales taxes alaska delaware montana new hampshire and oregon 5 many have complex sales tax laws that exclude some goods like food and reduce the percentage charged on other products such as cars a number of states impose higher sin taxes on cigarettes and liquor many states have a use tax which is due on major items purchased outside of the state most notably vehicles bought in one state but registered in another municipal authorities typically issue bonds to fund some capital projects in the community investors who purchase municipal bonds are lending money to the government which promises to pay a set amount of interest over time and repay the principal on a future date to service the debt that is to fulfill interest and principal repayment obligations on the bonds a municipal government may issue a new tax or raise existing local taxes 6 | |
what do local taxes pay for | local taxes are used by municipal and state governments to pay for public services and the people who deliver them local taxes pay the salaries of police and fire personnel and other public employees they keep the schools and libraries running run public transit systems build and repair local roads and maintain public parks and recreation facilities | |
which state has the highest income tax | california has the highest income tax of any state with a rate as high as 13 3 for the top earners as of 2023 new york hawaii and new jersey also have double digit income taxes 7 | |
which state has the lowest income tax | there are seven states with no personal income tax as of 2023 they are wyoming texas tennessee south dakota nevada florida and alaska in addition new hampshire has a tax on interest and dividend income but not wages and washington has a tax on the capital gains of high income earners only 7 | |
what does lock in profits mean | locking in profits refers to the realization of previously unrealized gains accrued in a security by closing all or a portion of the holdings when an investor holds an open position they may accrue unrealized or paper gains or losses that aren t realized until the position is closed an example is when an investor that s long on a security can lock in profits by selling their stake for a gain by doing this they are no longer subject to changes in the underlying also known as realization or taking money off the table understanding lock in profitstraders and investors may lock in profits for many different reasons but often times it s to reduce risk long term investors may lock in profits to maintain their portfolio balance for example an investor may have started with a portfolio divided equally among five funds if one fund outperforms its portfolio allocation might grow from 20 to 30 which exposes the investor to added risk the investor may lock in the profits for a portion of the outperforming fund and redistribute the proceeds among the other four funds to maintain an ideal portfolio allocation that minimizes risk and maximizes profits short term traders often lock in profits to generate income and reduce risk for example a trader may open a long position after a bullish earnings announcement with a series of price targets after the stock reaches the first price target the trader may lock in profits for one third of the position and continue to hold the other two thirds of the position until a higher price target is reached this way the trader is taking some money off the table and reducing their risk if the stock were to suddenly turn lower traders set price targets to lock in profits using various forms of technical analysis such as technical indicators or chart patterns whereas long term investors may lock in profits based on asset allocations or risk tolerance example of locking in profitssuppose that you purchase 100 shares of acme co for 12 and the price went up to 36 two days later all potential profits are unrealized because the position isn t partially or fully closed if the stock moves lower your profits will dwindle and vice versa if it goes higher you may decide to lock in the profits by selling 50 shares because 50 x 36 1 800 even if the stock ends up dropping to 1 you will have still made a profit in other words locking in profits made it possible to play with house money in the investment 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 a lock up agreement | a lock up agreement is a contractual provision preventing insiders of a company from selling their shares for a specified period of time they are commonly used as part of the initial public offering ipo process although lock up agreements are not required under federal law underwriters will often require executives venture capitalists vcs and other company insiders to sign lock up agreements in order to prevent excessive selling pressure in the first few months of trading following an ipo | |
how lock up agreements work | lock up periods typically last 180 days but on occasion can be as brief as 90 days or as long as one year sometimes all insiders will be locked out for the same period of time in other cases the agreement will have a staggered lock up structure in which different classes of insiders are locked out for different periods of time although federal law does not require companies to employ lock up periods they may nevertheless be required under states blue sky laws 1the details of a company s lock up agreements are always disclosed in the prospectus documents for the company in question these can be secured either by contacting the company s investor relations department or by using the securities and exchanges commission s sec electronic data gathering analysis and retrieval edgar database the purpose of a lock up agreement is to prevent company insiders from dumping their shares on new investors in the weeks and months following an ipo some of these insiders may be early investors such as vc firms who bought into the company when it was worth significantly less than its ipo value therefore they may have a strong incentive to sell their shares and realize a gain on their initial investment similarly company executives and certain employees may have been given stock options as part of their employment agreements as in the case of vcs these employees may be tempted to exercise their options and sell their shares as the company s ipo price would almost certainly be far above the exercise price of their options special considerationsfrom a regulatory perspective lock up agreements are meant to help protect investors the scenario that the lock up agreement is meant to avoid is a group of insiders taking an overvalued company public then dumping it on investors while running away with the proceeds this was a real issue during several periods of market exuberance in the united states and is the reason why some blue sky laws still have lock ups as a legal requirement even when a lock up agreement is in place investors that are not insiders to the company can still be affected once that lock up agreement runs past its expiration date when lock ups expire company insiders are permitted to sell their stock if many of the insiders and vcs are looking to exit this can result in a drastic drop in the share price due to the huge increase in the supply of the stock of course an investor can look at this in two ways depending on their perception of the quality of the underlying company the post lock up drop if it indeed occurs can be an opportunity to buy shares at a temporarily depressed price on the other hand it can be the first sign that the ipo was overpriced signaling the start of a long term decline example of a lock up agreementstudies have shown that the expiration of a lock up agreement is generally followed by a period of abnormal returns unfortunately for investors these abnormal returns are more often in the negative direction interestingly enough some of these studies found that staggered lock up agreements can actually impact a stock more negatively than those with a single expiration date this is surprising as staggered lock up agreements are often seen as a solution to the post lock up dip | |
what is a lock up period | a lock up period is a window of time when investors are not allowed to redeem or sell shares of a particular investment there are two main uses for lock up periods those for hedge funds and those for start ups ipo s for hedge funds the lock up period is intended to give the hedge fund manager time to exit investments that may be illiquid or otherwise unbalance their portfolio of investments too rapidly hedge fund lock ups are typically 30 90 days giving the hedge fund manager time to exit investments without driving prices against their overall portfolio for start ups or companies looking to go public through an ipo lock periods help show that company leadership remains intact and that the business model remains on solid footing it also allows the ipo issuer to retain more cash for continuing growth | |
how a lock up period works | the lock up period for hedge funds corresponds with the underlying investments of each fund for example a long shortfund invested mostly in liquid stocks may have a one month lock up period however because event driven or hedge funds often invest in more thinly traded securities like distressed loans or other debt they tend to have prolonged lock up periods still other hedge funds may have no lockup period at all depending on the structure of the fund s investments | |
when the lock up period ends investors may redeem their shares according to a set schedule often quarterly they normally must give a 30 to 90 day notice so that the fund manager may liquidate underlying securities that allow for payment to the investors | during the lock up period a hedge fund manager may invest in securities according to the fund s goals without concern for share redemption the manager has time for building strong positions in various assets and maximizing potential gains while keeping less cash on hand in the absence of a lock up period and scheduled redemption schedule a hedge fund manager would need a great amount of cash or cash equivalents available at all times less money would be invested and returns may be lower also because each investor s lock up period varies by his personal investment date massive liquidation cannot take place for any given fund at one time lock up periods can also be used to retain key employees where stock awards are not redeemable for a certain period to keep an employee from moving to a competitor maintain continuity or until they have completed a key mission example of a lock up periodas an example a fictitious hedge fund epsilon co invests in distressed south american debt the interest returns are high but the market liquidity is low if one of epsilon s customers sought to sell a large portion of its portfolio in epsilon at one time it would likely send prices far lower than if epsilon sold portions of its holdings over a longer period of time but since epsilon has a 90 day lock up period it gives them time to sell more gradually allowing the market to absorb the sales more evenly and keep prices more stable resulting in a better outcome for the investor and epsilon than may otherwise have been the case special considerationsthe lock up period for newly issued public shares of a company helps stabilize the stock price after it enters the market when the stock s price and demand are up the company brings in more money if business insiders sold their shares to the public it would appear the business is not worth investing in and stock prices and demand would go down | |
what is lockbox banking | lockbox banking is a service provided by banks to companies for the receipt of payment from customers under the service the payments made by customers are directed to a special post office box instead of going to the company the bank goes to the box retrieves the payments processes them and deposits the funds directly into the company s bank account | |
what is locked in | locked in describes a situation wherein an investor is unwilling or unable to trade a security because of regulations taxes or penalties associated with doing so this may occur in an investment vehicle such as a retirement plan that an employee may not access before a specified retirement date understanding locked inif there is an increase in the value of stocks held by an individual the shareholder will be subject to a capital gains tax with some exceptions to reduce the tax burden an investor could shelter these gains in a retirement account the individual is considered locked in because if a portion of this investment is withdrawn prior to maturity the owner will be taxed at a higher rate than if they had waited locked in securities can describe stock options and warrants offered to employees under incentive programs that promote company loyalty and encourage strong performance many of these programs come with mandatory vesting periods during which the employee has been granted the securities but may not yet exercise them meaning converted to cash or stock typically such shares or warrants must be held for several years before they can be exercised there may be phases of the locked in period when at stipulated intervals the shares change ownership or tax status even after options or warrants have been converted into stock and granted to an employee there may be another holding period before they can sell those shares in such instances the employees usually receive the options at the market price at the time they were granted which may represent a deep discount to the market price when they are exercised depending on when the stock is sold the proceeds might be taxed at a lower rate than initially imposed reasons for locked in shares | |
when a company launches an initial public offering ipo or a first time issue of its stock to the general public there may be lock in stipulations on shares held by founders promoters and other early backers of the company this is to prohibit these people as company insiders from selling or transferring shares during the ipo period when they might have advantageous company information that outside investors don t | this period might last 90 days or even several years after the ipo a lock in period mitigates the possibility of such manipulation by restricting insider trades executives and senior management might also be compensated with locked in shares that are not released for a period of time after they are initially granted in order to encourage superior performance | |
what is a locked in retirement account lira | a locked in retirement account lira is a type of registered pension account in canada that does not permit withdrawals before retirement except in exceptional circumstances locked in retirement accounts are designed to hold pension funds for former employer sponsored plan participants and certain others until they reach retirement age understanding locked in retirement accounts liras an lira is a tax deferred retirement account used to shelter money transferred in from an employer sponsored pension plan much like a 401 k to individual retirement account ira rollover in the united states an lira can only be funded in that way and you cannot make additional contributions to it transferring money from an employer pension into an lira is allowed only under certain circumstances for example the beneficiary may have left the employer the pension funds may have been divided up with a former spouse as a result of a divorce settlement or the beneficiary may have died leaving the money in their pension to an heir cash withdrawals are not permitted while the funds are locked in although the account may be unlocked under certain emergency circumstances pension funds that are transferred to an lira can later be used to purchase a life annuity or can be transferred to a life income fund lif or a locked in retirement income fund lrif or some combination of those once the account s beneficiary reaches retirement age the life annuity lif or lrif will provide them with a pension for life a registered retirement savings plan rrsp except for the locked in kind can be cashed in at the owner s discretion an lira does not have such an option if the employer pension plan is under federal rather than provincial jurisdiction then the participant s money would be transferred into a locked in registered retirement savings plan also known as a locked in rrsp rather than an lira the two are very similar in the way they work government requirements for liraslira plans are governed by provincial pension laws every locked in pension must comply with the laws of a specific province according to the qu bec government website for example depending on the province in which the plan owner lives there can be different rules on how to unlock locked in pension funds the allowable reasons for unlocking an lira may include low income potential foreclosure eviction from a rental first month s rent and security deposit high medical or disability costs shortened life expectancy and permanent departure from canada unlocking 50 of an lira can be done one time if you are 55 or older in some provinces small balance unlocking is allowed if the balance is under a certain amount if you need to take money from an lira before it would normally be allowed it s best to consult a financial advisor who knows the rules that apply in your province especially if the amount involved is substantial | |
how are locked in retirement accounts liras taxed | the money in a locked in retirement account lira continues to grow tax deferred until it is withdrawn | |
where can you buy a life income fund lif or a locked in retirement income fund lrif | life income funds lifs and locked in retirement income funds lrifs are available from banks credit unions trust companies and insurance companies the financial institution must be on the province s approved list of institutions to accept transfers of locked in funds | |
what is a life annuity | a life annuity is an insurance contract that provides a guaranteed income for life typically in return for a lump sum payment the bottom linea locked in retirement account lira can be used to hold money transferred out of an employer sponsored retirement plan without losing its tax deferred status liras are governed by provincial law and may be opened only under certain circumstances at retirement the account beneficiary can transfer the money to an account that will provide them with a regular income for life | |
definition of log normal distribution | a log normal distribution is a statistical distribution of logarithmic values from a related normal distribution a log normal distribution can be translated to a normal distribution and vice versa using associated logarithmic calculations understanding normal and lognormala normal distribution is a probability distribution of outcomes that are symmetrical or form a bell curve in a normal distribution 68 of the results fall within one standard deviation and 95 fall within two standard deviations while most people are familiar with a normal distribution they may not be as familiar with a log normal distribution a normal distribution can be converted to a log normal distribution using logarithmic mathematics that is primarily the basis as log normal distributions can only come from a normally distributed set of random variables there can be a few reasons for using log normal distributions in conjunction with normal distributions in general most log normal distributions are the result of taking the natural log where the base is equal to e 2 718 however the log normal distribution can be scaled using a different base which affects the shape of the lognormal distribution overall the log normal distribution plots the log of random variables from a normal distribution curve in general the log is known as the exponent to which a base number must be raised in order to produce the random variable x that is found along a normally distributed curve applications and uses of log normal distribution in financenormal distributions may present a few problems that log normal distributions can solve mainly normal distributions can allow for negative random variables while log normal distributions include all positive variables one of the most common applications where log normal distributions are used in finance is in the analysis of stock prices the potential returns of a stock can be graphed in a normal distribution the prices of the stock however can be graphed in a log normal distribution the log normal distribution curve can therefore be used to help better identify the compound return that the stock can expect to achieve over a period of time note that log normal distributions are positively skewed with long right tails due to low mean values and high variances in the random variables lognormal distribution in excellognormal distribution can be done in excel it is found in the statistical functions as lognorm dist 1excel defines it as the following lognorm dist x mean standard dev cumulative returns the lognormal distribution of x where ln x is normally distributed with parameters mean and standard dev to calculate lognorm dist in excel you will need the following x value at which to evaluate the functionmean the mean of ln x standard deviation the standard deviation of ln x which must be positive | |
what is a logarithmic price scale | a logarithmic price scale also referred to as a log scale is a type of scale used on a chart that is plotted such that two equivalent price changes are represented by the same vertical distance on the scale understanding logarithmic price scalesthe distance between the numbers on the logarithmic price scale decreases as the price of the asset increases after all a 1 00 increase in price becomes less influential as the price moves higher since it corresponds to less of a percentage change the alternative to a logarithmic price scale is known as a linear price scale logarithmic price scales are generally accepted as the default setting for most charting services and they re used by the majority of technical analysts and traders common percent changes are represented by an equal spacing between the numbers in the scale for example the distance between 10 and 20 is equal to the distance between 20 and 40 because both scenarios represent a 100 increase in price these charts differ from those using linear price scales which look at dollars instead of percentage points on those charts the prices on the y axis are equally spaced rather than becoming increasingly condensed as the asset price moves higher logarithmic price scales tend to show less severe price increases or decreases than linear price scales for example if an asset price has collapsed from 100 00 to 10 00 the distance between each dollar would be very small on a linear price scale making it impossible to see a big move from 15 00 to 10 00 logarithmic price scales solve these problems by adjusting the prices based on the percent change in other words a significant percentage move will always correspond with a significant visual move on logarithmic price scales linear price scales can be helpful when you re analyzing assets that aren t as volatile since they can help you visualize how far the price must move to reach a buy or sell target however it s usually a good idea to view linear charts on a large screen to ensure that all of the prices are viewable logarithmic price scale examplethe following chart shows an example of a logarithmic price scale for the nvidia corp nvda image by sabrina jiang investopedia 2021in the above chart you can see that the space between 20 00 and 40 00 is much wider than the space between 100 00 and 120 00 despite the absolute difference being 20 00 in both cases this is because the difference between 20 00 and 40 00 is 100 while the difference between 100 00 and 120 00 is just 20 | |
what is logistics | logistics refers to the overall process of managing how resources are acquired stored and transported to their final destination logistics management involves identifying prospective distributors and suppliers and determining their effectiveness and accessibility logistics managers are referred to as logisticians logistics was initially a military based term used in reference to how military personnel obtained stored and moved equipment and supplies the term is now used widely in the business sector particularly by companies in the manufacturing sectors to refer to how resources are handled and moved along the supply chain understanding logistics in management and businessin simple terms the goal of logistics management is to have the right amount of a resource or input at the right time getting it to the appropriate location in proper condition and delivering it to the correct internal or external customer for example in the natural gas industry logistics involves managing the pipelines trucks storage facilities and distribution centers that handle oil as it is transformed along the supply chain an efficient supply chain and effective logistical procedures are essential to reduce costs and to maintain and increase efficiency poor logistics leads to untimely deliveries failure to meet the needs of clientele and ultimately causes the business to suffer the concept of business logistics has been transformed since the 1960s the increasing intricacy of supplying companies with the materials and resources they need along with the global expansion of supply chains has led to a need for specialists known as supply chain logisticians in the modern era the technology boom and the complexity of logistics processes have spawned logistics management software and specialized logistics focused firms that expedite the movement of resources along the supply chain one reason why large online retailers like amazon have come to dominate the retail landscape is the overall innovation and efficiency of their logistics along every link of the supply chain manufacturing companies may choose to outsource the management of their logistics to specialists or manage logistics internally if it is cost effective to do so special considerationsthe tasks for which a logistician is responsible vary depending on the business primary responsibilities include overseeing and managing inventory by arranging for appropriate transportation and adequate storage for the inventory a qualified logistician plans out the logistics process and coordinates the steps as inventory and resources move along the supply chain 1specialized training in supply chain management and logistics often includes core or elective courses or even discrete programs of study in business education a business degree that emphasizes these skills or in some cases a technical degree in systems analysis or database management is usually necessary to begin what is often a well paid career as a logistician 2 | |
what is logistics in business | in business logistics is the process of transporting and storing raw materials finished goods inventory and other resources logistics in a business is typically made up of many components including customer service demand forecasting warehousing material handling inventory control order processing and transportation | |
why is logistics important | logistics is critical to a company s bottom line it enables the movement of materials or goods the satisfaction of contracts and the fulfillment of services effective logistics management ensures smooth movement along the supply chain and can provide a competitive advantage | |
what jobs are available in the logistics industry | careers in logistics can include truck driver customer service representative dispatcher freight agent supply chain manager transportation analyst procurement manager logistician and operations manager among others a degree in logistics or business administration will be helpful for many roles in logistics including logistician a career that is expected to grow much faster than average 3the bottom line | |
what was the london interbank bid rate libid | the london interbank bid rate libid was the average interest rate at which major london banks bid for eurocurrency deposits from other banks in the interbank market it was the bid rate that banks were willing to pay for eurocurrency deposits and other banks unsecured funds in the london interbank market while the more popular libor was the offered rate eurocurrency deposits refer to money in the form of bank deposits of a currency outside that currency s issuing country they may be of any currency in any country as a result of the libor rate fixing scandals libid was phased out along with libor beginning in 2021 1understanding the london interbank bid rate libid the london interbank bid rate libid was the other side of the more famous london interbank offered rate libor whereas libor was the ask rate at which a bank is willing to lend eurocurrency deposits to another bank libid was the bid rate at which banks are willing to borrow the difference between the two is the bid ask spread on these transactions when libid was high it meant that borrowers were seeking to borrow funds with increasing demand while libor was a popular benchmark interest rate that was calculated and published by intercontinental exchange ice libid was not standardized or publicly available it was not used outside of the interbank lending market the most common currency deposited as eurocurrency is the u s dollar for example if u s dollars are deposited in any bank outside the u s for example in europe or the u k then the deposit is referred to as a eurocurrency eurodollars in this case the difference between libid and liborboth libid and libor were reference rates set by banks in the london interbank market the london interbank market is a wholesale money market in london where banks exchange currencies either directly or through electronic trading platforms starting in the 1970s libor was the benchmark rate for interbank lending and is calculated for seven maturities for five currencies the swiss franc the euro the pound sterling the u s dollar and the japanese yen before libor fell out of use there were 35 different libor rates released to the market every day libor was phased out due to scandals and questions around its validity as a benchmark rate most libor rates ceased publication on june 30 2023 and were replaced by the secured overnight financing rate sofr as part of this phase out libor one week and two month usd libor rates ceased publication on dec 31 2021 2 | |
how the libid rate was used | until the rate fixing scandal both of these rates especially libor were considered the foremost global reference rates for short term interest rates of a variety of global financial instruments such as short term interest futures contracts forward rate agreements interest rate swaps and currency options libor was also a key driver in the eurodollar market and is the basis for retail products like mortgages and student loans they were derived from a filtered average of the world s most creditworthy banks interbank bid ask rates for institutional loans with maturities that range between overnight and one year the london interbank mean rate limean is the calculated average between libor and libid and could be used to identify the spread between the two rates limean was also used by institutions borrowing and lending money in the interbank market rather than using libor or libid and it was a reliable reference to the mid market rate of the interbank market | |
are libid and libor still used | the last libor rate was published on june 30 2023 after that date contracts that referenced libor switched to a different reference rate such as sofr however u k regulators required the continued publication of synthetic u s dollar libor for at least 15 months after that date 2 | |
why were libid and libor phased out | the london interbank offer rate libor and bid rate libid were reference rates that were used to measure the cost of lending and borrowing money between british banks however the validity of libor was questioned in the 2012 rate fixing scandal when it was discovered that some bankers were colluding to manipulate the reference rate the two rates were slowly phased out starting in 2021 the final libor was published in 2023 | |
what is replacing libor and libid | as a reference rate libor was replaced by the secured overnight financing rate sofr however a synthetic u s dollar libor is still being published in order to aid the transition 2the bottom linelibid was an interbank reference rate used to measure the cost of borrowing money between different banks along with libor it was frequently used in variable rate mortgages and contracts to measure the changing costs of borrowing money libid and libor were phased out in 2021 and replaced by the secure overnight financing rate sofr | |
what was the london interbank offered rate libor | the london interbank offered rate libor was a benchmark interest rate for short term loans between major global banks it was phased out in 2023 from 1986 to the 2000s libor was a globally accepted key benchmark for the cost of borrowing between banks the rate was calculated and published each day by the intercontinental exchange ice but scandals and questions around its validity as a benchmark rate resulted in it being phased out according to the federal reserve and regulators in the united kingdom libor was phased out on june 30 2023 and replaced by the secured overnight financing rate sofr libor one week and two month usd libors stopped publishing as of dec 31 2021 as part of the phaseout 1 some usd rates are still published using a synthetic methodology but these rates will cease in sept 2024 2mira norian investopediaunderstanding liborlibor was the average interest rate at which major global banks borrow from one another it was based on five currencies the u s dollar the euro the british pound the japanese yen and the swiss franc and served seven different maturities overnight spot next one week and one two three six and 12 months 1interbank lending is the basis for consumer loans in countries around the world so it impacts consumers just as much as it does financial institutions the interest rates on various credit products such as credit cards car loans and adjustable rate mortgages arms fluctuate based on the interbank rate this change in rate helps determine the ease of borrowing between banks and consumers the combination of five currencies and seven maturities led to a total of 35 different libors calculated and reported each business day the most commonly quoted rate was the three month u s dollar rate usually referred to as the current libor 1ice calculated the libor by asking major global banks how much they would charge other banks for short term loans the association took out the highest and lowest figures then calculated the average from the remaining numbers this is known as the trimmed average this rate was posted each morning as the daily rate and announced and published once a day around 11 55 a m london time by the ice benchmark administration iba 1libor was phased out in june 2023 and replaced by the secure overnight financing rate sofr | |
how was libor calculated | the iba had a designated panel of global banks for each currency and tenor pair for example 16 major banks including bank of america barclays citibank deutsche bank jpmorgan chase and ubs constituted the panel for u s dollar libor only those banks with a significant role in the london market were considered eligible for membership on the ice libor panel and the selection process was held annually 1in april 2018 the iba submitted a new proposal to strengthen the libor calculation methodology it suggested a standardized transaction based data driven layered method called the waterfall methodology for determining libor 3the iba calculated the libor using a trimmed mean approach applied to all the responses received trimmed mean is a method of averaging which eliminates a small specified percentage of the largest and smallest values before calculating the mean for libor figures in the highest and lowest quartile are thrown out and averaging is performed on the remaining numbers 4uses of liborlibor has been used worldwide in a wide variety of financial products they include the following libor is also used as a standard gauge of market expectations for interest rates finalized by central banks it accounts for the liquidity premiums for various instruments traded in the money markets as well as an indicator of the health of the overall banking system a lot of derivative products are created launched and traded in reference to libor libor is also used as a reference rate for other standard processes like clearing price discovery and product valuation a brief history of liborthe need for a uniform measure of interest rates across financial institutions became necessary as the market for interest rate based products began evolving during the 1980s the british bankers association bba which represented the banking and financial services industry set up bba interest settlement rates in 1984 5further streamlining led to the evolution of bba libor in 1986 which became the default standard interest rate for transacting in the interest rate and currency based financial dealings between financial institutions at the local and international levels 5since then libor underwent many changes the major one is when bba libor changed to ice libor in february 2014 after the intercontinental exchange took over the administration 6currencies involved in calculating libor have also changed while new currency rates have been added many have been removed or integrated following the introduction of the euro rates the 2007 2008 financial crisis saw a significant decline in the number of tenors for which libor was calculated 7alternatives to liborthough libor was once accepted globally there are several other interest rates that are popularly followed around the globe for instance europe has the european interbank offered rate euribor japan has the tokyo interbank offered rate tibor china has the shanghai interbank offered rate shibor and india has the mumbai interbank offered rate mibor libor rate rigging scandalwhile libor was a long established global benchmark standard for interest rates it was also the subject of a major scandal of rate rigging major banks allegedly colluded to manipulate the libors they took traders requests into account and submitted artificially low libors to keep them at their preferred levels the intention behind the alleged malpractice was to bump up the profits of traders who were holding positions in libor based financial securities 8following reporting by the wall street journal in 2008 major global banks which were on the panels and contributed to the libor determination process faced regulatory scrutiny including investigations by the u s department of justice similar investigations were launched in other parts of the globe including in the u k and europe 9major banks and financial institutions including barclays icap rabobank royal bank of scotland ubs and deutsche bank faced heavy fines punitive actions were also taken against their employees who were found to be involved in the malpractice the scandal was also one of the primary reasons why libor shifted from bba administration to ice 8libor was susceptible to rate rigging because banks could submit artificially high or low estimates of their lending rates the new metric sofr uses actual lending rates not the banks estimations benefits of watching liborsdespite the rate setting scandals libors provided a useful benchmark for the level of activity in the global economy a falling libor meant it was easier to borrow money possibly forecasting an increase in economic activity a rising libor meant that it was getting harder to borrow money and that business activity was likely to slow down these rates are particularly significant to a prospective borrower when you borrow money from a bank libors may account for part of your interest rate a high libor meant that you could have to pay a higher interest rate on your mortgage or personal loan while a low libor meant a more favorable rate libor phaseoutfollowing the rate rigging scandals regulators initiated reforms to revise the benchmark rates and ultimately replace libor as the interbank borrowing rate u k banks were no longer required to publish libors after 2021 1the new system was designed to replace the conjecture surrounding interest rates and instead use actual transaction rates the secured overnight financing rate sofr replaced libor in 2023 the sofr is also a benchmark interest rate used for dollar denominated loans and derivative contracts sofr is different from libor in that it s based on actual observed transactions in the u s treasury market while libor used estimations of borrowing rates however sofr is used in the united states and the u k while other countries have their own benchmark rates to replace libor examples of libor based products and transactionsthe most straightforward example of a libor based transaction is a floating rate bond which pays an annual interest based on libor say at libor 0 5 as the value of libor changes the interest payment will change libor also applies to interest rate swaps contractual agreements between two parties to exchange interest payments at a specified time assume paul owns a 1 million investment that pays him a variable libor based interest rate equal to libor 1 each quarter since his earnings are subject to libor values and are variable in nature he wants to switch to fixed rate interest payments then there is peter who has a similar 1 million investment which pays him a fixed interest of 1 5 per quarter he wishes to get a variable earning as it may occasionally give him higher payments both paul and peter can enter into a swap agreement exchanging their respective interest receipts paul will receive the fixed 1 5 interest over his 1 million investment from peter which equals 15 000 while peter receives libor 1 variable interest from paul if libor is 1 then peter will receive 2 or 20 000 from paul since this figure is higher than what he owes to paul in net terms peter will get 5 000 20 000 15 000 from paul by next quarter if libor comes down to 0 25 peter will be eligible to receive 1 25 or 12 500 from paul in net terms paul will get 2 500 15 000 12 500 from peter such swaps essentially fulfill the requirement of both the transacting parties who wanted to change the type of interest receipts fixed and floating was libor reliable while libor was once a trusted benchmark for global interest rates the 2012 rate rigging scandal raised many questions about its objectivity many financial institutions are phasing out libor in favor of other benchmarks such as sofr | |
what is replacing libor | there are several alternative indexes that have been proposed to replace the usd libor one of them ameribor reflects the average borrowing costs for thousands of banks and financial institutions in the united states another is the secured overnight financing rate sofr based on the treasury repo rate in 2022 the u s congress passed legislation to make sofr the official replacement for libor in the united states 10 | |
what is the difference between libor and sofr | the primary difference between libor and sofr is the method by which the rates are generated libor uses the panel bank calculation which are inputs from panel banks to come up with the average rate sofr is the measure of the cost of borrowing cash overnight that is collateralized by u s treasuries in the repo market the bottom linelibor or the london interbank offered rate was a global benchmark that represented the interest rates on short term loans from one bank to another however the index fell under suspicion in 2012 when some bankers were discovered manipulating the index for their own benefit libor has since been nearly fully phased out with the last few rates to cease publication in late 2024 | |
what is the london metal exchange lme | the london metal exchange lme is a commodities exchange that deals in metals futures and options it is the largest exchange for options and futures contracts for base metals which include aluminum zinc lead copper and nickel the exchange also facilitates trading of precious metals like gold and silver the lme is located in london england but has been owned by hong kong exchanges and clearing since 2012 1 the prices discovered on the lme are considered the standard global prices for base metals understanding the london metal exchange lme the lme is one of the main commodities markets in the world and allows for the trading of metals options and futures contracts it also lists futures contracts on its london metal exchange index lmex which is an index that tracks the prices of the metals that trade on the exchange options and futures contracts on the lme are standardized with respect to expiration dates and size expiration dates are structured so that traders can choose from daily weekly and monthly contracts meanwhile contracts are traded in sizes called lots which vary from 1 to 65 metric tons in weight lot size will vary depending on the metal market participants on the lme are typically looking to hedge risk or seeking to take on risk a hedger might be a producer or consumer and seek a position in a future or options contract to protect from future price moves in the metals market on the other hand traders and speculators buy or sell metals futures or options to profit from short term price moves history of the lmethe london metal exchange can be traced back as far as the opening of the royal exchange in london in 1571 where traders in metal and a range of other commodities began to meet as britain became a major exporter of metals european merchants began to arrive to join in these activities according to the lme s website the origin of the ring tradition began in the early 18th century in the jerusalem coffee house here a merchant with metal to sell would draw a circle in the sawdust on the floor and call out change all those wishing to trade would assemble around the circle and make their bids and offers 1in 2012 the lme was acquired by the hong kong exchanges and clearing 1 consolidation has become a common trend among the world s exchanges as they battle to reduce costs and boost their survival prospects in a highly competitive sector for example the cme group acquired the new york mercantile exchange nymex in 2008 nymex in turn had merged with the comex commodities exchange in 1994 creating the largest physical commodity exchange at the time 2trading metals on the lmethe lme has three methods of trading metals open outcry through the lme select electronic trading platform or by telephone systems the nature of commodity exchanges is changing rapidly the trend is moving in the direction of electronic trading and away from traditional open outcry trading where traders meet face to face or in trading pits in 2016 cme group closed the nymex commodities trading floor nymex was the last of its kind but the bulk of its energy and metals volumes had shifted to computers 3 in a similar move a year earlier the cme shut down a commodity trading floor in chicago and ended a 167 year old tradition of face to face trading in favor of electronic trading 4it is unclear how long the lme will be able to maintain its physical open outcry trading model it is the only physical commodity exchange in europe remaining however the rapid advancement and acceptance of electronic trading are not working in favor of the open outcry model lme and ring trading ring trading is the method by which certain types of investment business are conducted on the lme trading activity occurs in five minute intervals known as rings within a six meter diameter circle a particular type of trading pit the pit contains two large display boards that show current prices each of the ring dealing members has a fixed seat within the ring behind which an assistant is permitted to stand to pass orders to the ring dealing member and to liaise with customers regarding market conditions ring sessions are divided by trading instruments for example steel trading takes place during the first session from 11 40 am to 11 45 am and in the second session 1 10 pm to 1 15 pm gmt trading occurs in five minute intervals in the following order steel aluminum alloy tin premium aluminum copper lead zinc nickel and cobalt ring trading at the lme occurs between 11 40 am and 5 00 pm however inter office telephone trading is available 24 hours a day check the lme s website for a detailed schedule example of lmean investor looking to trade on the lme has three options via the lme s electronic portal lmeselect the ring or on the 24 hour telephone market investors must conduct their trading through an lme member information on how to become a member as well as a list of lme certified members is available on the exchange s website once you have selected a method and member through which you will conduct your trading the next step is deciding which type of contract and for what metal you re looking to purchase the lme offers seven contracts for its fourteen underlying metals futures options tapos monthly average futures lmeminis trade at settlement and hkex london minis 56once you have decided what and how you want to trade simply log into your brokerage account and you re ready to go | |
what are lme warehouse and stock reports | the lme regularly publishes a number of reports on its website which include opening and closing stocks stock movements wait times and canceled and live warrants across locations and metals check the lme s website for the latest warehouse and stock reports | |
how do lme warrants work | lme warrants are documents that represent an entitlement to a specific lot of lme approved metal these documents also serve as a form of insurance for owners on march 1 2021 the lme switched to digital only warrants 7 | |
what is the lme official settlement price | the lme official settlement price is the last cash offer price at which all lme futures are settled the daily official settlement price is published between 12 30 and 1 25 gmt 8the bottom linewhile the chicago mercantile exchange cme group and the new york mercantile exchange nymex are two of the best known commodity exchanges in the u s the lme is the only remaining physical commodity exchange left in europe like many other industries the covid 19 pandemic caused the lme some difficulties however with a history dating back to 1571 commodity traders can rest assured that the exchange will adapt as necessary to provide investors with its services | |
what is the london stock exchange lse | the london stock exchange lse is the primary stock exchange in the united kingdom and its largest originating more than 300 years ago the regional exchanges were merged in 1973 to form the stock exchange of great britain and ireland later renamed the london stock exchange lse the financial times stock exchange ftse 100 share index or footsie is the dominant index containing 100 of the top blue chip stocks on the lse 12the stock exchange is physically located in the city of london in 2007 the london stock exchange merged with the milan stock exchange the borsa italiana to form the london stock exchange group 3understanding the london stock exchange lse london has long been one of the world s leading financial cities well known as a hub for international trade banking and insurance the history of the london stock exchange lse goes back to 1698 when broker john castaing began posting the prices of stocks and commodities at jonathan s coffee house which was a popular meeting place for businessmen to conduct trades castaing called his price list the course of the exchange and other things 45by 1801 it became clear that a formal system was needed to deter fraud and unscrupulous traders brokers agreed to a set of rules and paid a membership fee to belong to the exchange thus paving the way for the first regulated stock exchange in london 3through its primary markets the london stock exchange lse provides cost efficient access to some of the world s deepest and most liquid pools of capital it is home to a wide range of companies and provides electronic equities trading for listed companies the lse is the most international of all stock exchanges with thousands of companies from more than 60 countries and it is the premier source of equity market liquidity benchmark prices and market data in europe linked by partnerships to international exchanges in asia and africa the lse intends to remove cost and regulatory barriers from capital markets worldwide 6the lse and the big bangon oct 27 1986 the u k government deregulated the london stock market known as the big bang because of the massive changes that immediately ensued deregulation introduced electronic trading to the london stock exchange which replaced traditional open outcry trading the new system was efficient and faster allowing trading volumes to increase and enabling the lse to successfully rival other global exchanges such as the new york stock exchange nyse 5the big bang was part of the government s reform program to eliminate overregulation and encourage free market competition it introduced other significant changes to the structure of the financial markets these include the elimination of minimum fixed commissions on trades and the removal of the separation between companies that traded stocks and those that advised investors these changes increased competition among brokerage companies and led to a series of mergers and acquisitions another big bang change allowed foreign ownership of u k brokers which opened london s market to international banks the main marketthe main market of the london stock exchange is one of the world s most diverse stock markets with companies making up 40 different sectors a listing on the lse s main market gives companies access to real time pricing deep pools of capital benchmarking through the ftse uk index series and significant levels of media coverage research and announcements 6there are a number of different ways for companies to join the main market including the following the premium segment applies only to equity shares issued by commercial trading companies premium listing issuers are required to meet the uk s super equivalent rules these companies may have access to a lower cost of capital and to investors who seek out companies that adhere to the highest standards a company with a premium listing also has the possibility of being included in one of the ftse indices 7the standard segment is open to the issuing of equity shares global depositary receipts gdrs debt securities and derivatives that must comply with minimum requirements the overall compliance burden is lighter for companies with a standard listing a standard listing helps companies from emerging markets attract investments from london s large pool of available capital 7the specialist fund segment is designed specifically for high growth revenue generating businesses and highly specialized investment entities that target institutional investors or professionally advised investors respectively this segment is for companies that are not eligible for a premium or standard listing but are seeking funding to grow their companies 8 | |
what companies does the london stock exchange group own | apart from the london stock exchange lse itself the lseg also owns ftse russell refinitiv and lch clearing 9 | |
when was the london stock exchange established | the lse was formed in 1801 as london s first regulated exchange 3 | |
what are the top companies on the london exchange | the largest companies by market cap listed on the lse as of june 21 2023 are the bottom linethe london stock exchange lse is the main stock exchange in the united kingdom and one of the largest stock exchanges in the world it has a long history dating back to the 1600s and has evolved over the course of its existence the exchange lists many of the largest companies in the world such as shell hsbc and bp 1110 | |
what is a long hedge | a long hedge refers to a futures position that is entered into for the purpose of price stability on a purchase long hedges are often used by manufacturers and processors to remove price volatility from the purchase of required inputs these input dependent companies know they will require materials several times a year so they enter futures positions to stabilize the purchase price throughout the year for this reason a long hedge may also be referred to as an input hedge a buyers hedge a buy hedge a purchasers hedge or a purchasing hedge understanding long hedgesa long hedge represents a smart cost control strategy for a company that knows it needs to purchase a commodity in the future and wants to lock in the purchase price the hedge itself is quite simple with the purchaser of a commodity simply entering a long futures position a long position means the buyer of the commodity is making a bet that the price of the commodity will rise in the future if the good rises in price the profit from the futures position helps to offset the greater cost of the commodity example of a long hedgein a simplified example we might assume that it is january and an aluminum manufacturer needs 25 000 pounds of copper to manufacture aluminum and fulfill a contract in may the current spot price is 2 50 per pound but the may futures price is 2 40 per pound in january the aluminum manufacturer would take a long position in a may futures contract on copper this futures contract can be sized to cover part or all of the expected order sizing the position sets the hedge ratio for example if the purchaser hedges half the purchase order size then the hedge ratio is 50 if the may spot price of copper is over 2 40 per pound then the manufacturer has benefited from taking a long position this is because the overall profit from the futures contract helps offset the higher purchasing cost paid for copper in may if the may spot price of copper is below 2 40 per pound the manufacturer takes a small loss on the futures position while saving overall thanks to a lower than anticipated purchasing price long hedges vs short hedgesbasis risk makes it very difficult to offset all pricing risk but a high hedge ratio on a long hedge will remove a lot of it the opposite of a long hedge is a short hedge which protects the seller of a commodity or asset by locking in the sale price hedges both long and short can be thought of as a form of insurance there is a cost to setting them up but they can save a company a large amount in an adverse situation | |
what is a long jelly roll | a long jelly roll is an option strategy that aims to profit from a form of arbitrage based on option pricing it looks for a difference between the pricing of a horizontal spread also called a calendar spread composed of call options at a given strike price and the same horizontal spread with the same strike price composed of put options understanding long jelly rollsa long jelly roll is a complex spread strategy that positions the spread as neutral fully hedged in relation to the directional movement of the share price so that the trade can instead profit from the difference in the purchase price of those spreads this is possible because horizontal spreads made up of call options should be priced the same as a horizontal spread made up of put options with the exception that the put option should have the dividend payout and interest cost subtracted from the price so the price of the call spread should typically be a bit higher than the price of the put spread how much higher depends on whether a dividend payout will occur before expiration a jelly roll is created from the combination of two horizontal spreads the spread can be constructed as a long spread meaning the call spread was bought and the put spread was sold or as a short spread where the put spread is bought and the call spread is sold the strategy calls for buying the cheaper spread and selling the longer spread in theory the profit comes when the trader gets to keep the difference between the two spreads variations of this strategy can be approached by implementing a variety of modifications including increasing the number of long positions on one or both of the horizontal spreads the strike prices can also be varied for each of the two spreads but any such modification creates additional risks to the trade for retail traders the transaction costs would likely make this trade unprofitable since the price difference is rarely more than a few cents but occasionally a few exceptions may occur making an easy profit possible for the astute trader long jelly roll constructionconsider the following example of when a trader would want to construct a long jelly roll spread suppose that on jan 8 during normal market hours amazon stock shares amzn were trading around 1 700 00 per share suppose also the following jan 15 jan 22 call and put spreads with weekly expiration dates were available to retail buyers for the 1700 strike price spread 1 jan 15 call short jan 22 call long price 9 75spread 2 jan 15 put short jan 22 put long price 10 75if a trader is able to buy spread 1 and spread 2 at these prices then they can lock in a profit because they have effectively purchased a long position in the stock at 9 75 and a short position in the stock at 10 75 this happens because the long call and the short put position create a synthetic stock position that acts very much like holding shares conversely the remaining short call position and long put position create a synthetic short stock position now the net effect becomes clear because it can be shown that the trader initiated a calendar trade with the ability to enter the stock at 1 700 and exit the stock at 1 700 the positions cancel each other out leaving the only difference between the option spread prices to be a concern that matters if the call horizontal spread can actually be acquired for one dollar less than the put option then the trader can lock in 1 per share per contract so a 10 contract position would net 1 000 short jelly roll constructionin the short jelly roll the trader uses a short call horizontal spread with a long put horizontal spread the opposite of the long construction the spreads are constructed with the same horizontal spread methodology but the trader is looking for the call spread pricing to be much lower than the put spread if such a price mismatch were to occur that is not explained by upcoming dividend payments or interest costs then the trade would be desirable | |
what is a long position | the term long position describes what an investor has purchased when they buy a security or derivative with the expectation that it will rise in value investopedia nono floresunderstanding a long positioninvestors can establish long positions in securities such as stocks mutual funds or currencies or even in derivatives such as options and futures holding a long position is a bullish view a long position is the opposite of a short position also known simply as short the term long position is often used in the context of buying an options contract the trader can hold either a long call or a long put option depending on the outlook for the underlying asset of the option contract for example an investor who hopes to benefit from an upward price movement in an asset will go long on a call option the call gives the holder the option to buy the underlying asset at a certain price conversely an investor who expects an asset s price to fall will be long on a put option and maintain the right to sell the asset at a certain price types of long positionsin reality long is an investing term that can have multiple meanings depending on in what context it is used the most common meaning of long refers to the length of time an investment is held however the term long has a different meaning when used in options and futures contracts going long on a stock or bond is the more conventional investing practice in the capital markets especially for retail investors with a long position investment the investor purchases an asset and owns it with the expectation that the price is going to rise this investor normally has no plan to sell the security in the near future in reference to holding equities which have an inherent bias to rise long can refer to a measurement of time as well as bullish intent an expectation that assets will appreciate in value in the long run the buy and hold strategy spares the investor the need for constant market watching or market timing and allows time to weather the inevitable ups and downs plus history is on one s side as the stock market inevitably appreciates over time of course that doesn t mean there can t be sharp portfolio decimating drops along the way which can be disastrous if one occurs right before an investor was planning to retire or needed to liquidate holdings for some reason 1 a prolonged bear market can also be troublesome as it often favors short sellers and those betting on declines finally going long in the outright ownership sense means a good amount of capital is tied up which could result in missing out on other opportunities in terms of options contracts a long position is one that benefits from a rise in the price of the underlying security these include being long calls or short puts | |
when a trader buys or holds a call options contract from an options writer they are long due to the power they hold in being able to buy the asset an investor who is long a call option is one who buys a call with the expectation that the underlying security will increase in value the long position call holder believes the asset s value is rising and may decide to exercise their option to buy it by the expiration date | but not every trader who holds a long position believes the asset s value will increase the trader who owns the underlying asset in their portfolio and believes the value will fall can buy a put option contract they still have a long position because they have the ability to sell the underlying asset they hold in their portfolio the holder of a long put option believes the price of an asset will fall they hold the option with the hope that they will be able to sell the underlying asset at an advantageous price by the expiry so as you can see the long position on an options contract can express either a bullish or bearish sentiment depending on whether the long contract is a put or a call in contrast the short position on an options contract does not own the stock or other underlying asset but borrows it with the expectation of selling it and then repurchasing it at a lower price investors and businesses can also enter into a long forward or futures contract to hedge against adverse price movements a company can employ a long hedge to lock in a purchase price for a commodity that is needed in the future futures differ from options in that the holder is obligated to buy or sell the underlying asset they do not get to choose but must complete these actions suppose a jewelry manufacturer believes the price of gold is poised to turn upwards in the short term the firm can enter into a long futures contract with its gold supplier to purchase gold in three months from the supplier at 1 300 in three months whether the price is above or below 1 300 the business that has a long position on gold futures is obligated to purchase the gold from the supplier at the agreed contract price of 1 300 the supplier in turn is obligated to deliver the physical commodity when the contract expires speculators also go long on futures when they believe the prices will go up they don t necessarily want the physical commodity as they are only interested in capitalizing on the price movement before expiry a speculator holding a long futures contract can sell the contract in the market pros and cons of a long positionlocks in a pricelimits lossesdovetails with historic market performancesuffers in abrupt price changes short term movesmay expire before advantage is realizedexample of a long positionfor example let s say jim expects microsoft corporation msft to increase in price and purchases 100 shares of it for his portfolio jim is therefore said to be long 100 shares of msft now let s consider a nov 17 call option on microsoft msft with a 75 strike price and 1 30 premium if jim is still bullish on the stock he may decide to purchase or go long one msft call option one option equates to 100 shares instead of purchasing the shares outright as he did in the previous example at expiry if msft is trading above the strike price plus the premium paid 75 1 30 jim will exercise his right to buy on his long option to purchase 100 shares of msft at 75 the writer of the options contract the short position that jim bought must sell him the 100 shares at the 75 price taking a long position does not always mean that an investor expects to gain from an upward movement in the price of the asset or security in the case of a put option a downward trajectory in the price of the security is profitable for the investor let s say another investor jane currently has a long position in msft for 100 shares in her portfolio but is now bearish on it she takes a long position on one put option the put option is trading for 2 15 and has a strike price of 75 set to expire on nov 17 at the time of expiry if msft drops below the strike price minus the premium paid 75 2 15 jane will exercise the long put option to sell her 100 msft shares for the strike price of 75 in this case the option writer must buy jane s shares at the agreed upon 75 price even if the shares are trading at less on the open market | |
where can a long position be used | investors can establish long positions in securities such as stocks mutual funds or any other asset or security in reality long is an investing term that can have multiple meanings depending on in what context it is used holding a long position is a bullish view in most instances with the exception of put options | |
how is a long different from a short | a short position is the opposite of a long position in that it profits when the prices of securities go down | |
what is a long put | a long put refers to buying a put option typically in anticipation of a decline in the underlying asset the term long here has nothing to do with the length of time before expiration but rather refers to the trader s action of having bought the option with the hope of selling it at a higher price at a later point in time a trader could buy a put for speculative reasons betting that the underlying asset will fall which increases the value of the long put option a long put could also be used to hedge a long position in the underlying asset if the underlying asset falls the put option increases in value helping to offset the loss in the underlying understanding a long puta long put has a strike price which is the price at which the put buyer has the right to sell the underlying asset assume the underlying asset is a stock and the option s strike price is 50 that means the put option entitles that trader to sell the stock at 50 even if the stock drops to 20 for example on the other hand if the stock rises and remains above 50 the option is worthless because it is not useful to sell at 50 when the stock is trading at 60 and can be sold there without the use of an option if a trader wishes to utilize their right to sell the underlying at the strike price they will exercise the option exercising is not required instead the trader can simply exit the option at any time prior to expiration by selling it a long put option may be exercised before the expiration if it s an american option whereas european options can only be exercised at the expiration date if the option is exercised early or expires in the money the option holder would be short the underlying asset long put strategy vs shorting stocka long put may be a favorable strategy for bearish investors rather than shorting shares a short stock position theoretically has unlimited risk since the stock price has no capped upside a short stock position also has limited profit potential since a stock cannot fall below 0 per share a long put option is similar to a short stock position because the profit potentials are limited a put option will only increase in value up to the underlying stock reaching zero the benefit of the put option is that risk is limited to the premium paid for the option the drawback to the put option is that the price of the underlying must fall before the expiration date of the option otherwise the amount paid for the option is lost to profit from a short stock trade a trader sells a stock at a certain price hoping to be able to buy it back at a lower price put options are similar in that if the underlying stock falls then the put option will increase in value and can be sold for a profit if the option is exercised it will put the trader short in the underlying stock and the trader will then need to buy the underlying stock to realize the profit from the trade long put options to hedgea long put option could also be used to hedge against unfavorable moves in a long stock position this hedging strategy is known as a protective put or married put for example assume an investor is long 100 shares of bank of america corporation bac at 25 per share the investor is long term bullish on the stock but fears that the stock may fall over the next month therefore the investor purchases one put option with a strike price of 20 for 0 10 multiplied by 100 shares since each put option represents 100 shares which expires in one month the investor s hedge caps the loss to 500 or 100 shares x 25 20 less the premium 10 total paid for the put option in other words even if bank of america falls to 0 over the next month the most this trader can lose is 510 because all losses in the stock below 20 are covered by the long put option example of using a long putlet s assume apple inc aapl is trading at 170 per share and you think it s going to decrease in value by about 10 ahead of a new product launch you decide to go long 10 put options with a strike price of 155 and pay 0 45 your total long put options position outlay cost is 450 fees and commissions 1 000 shares x 0 45 450 if the share price of apple falls to 154 before expiry your put options are now worth 1 00 since you could exercise them and be short 1 000 shares of the stock at 155 and immediately buy it back to cover at 154 your total long put options position is now worth 1 000 less any fees and commissions or 1 000 shares x 1 00 1 000 your profit on the position is 122 1 000 450 450 going long put options allowed you to realize a much greater gain than the 9 4 fall in the underlying stock price alternatively if apple shares rose to 200 the 10 option contracts would expire worthless resulting in you losing your initial outlay cost of 450 | |
what is the long run | the long run is a situation in economics wherein all factors of production and costs are variable the long run allows firms to operate and adjust all costs there are also a variable number of producers in the market which means firms are able to enter and leave the market during times of profitability and loss in the long run profits are ordinary so there are no economic profits while a firm may be a monopoly in the short term it may expect competition in the long run | |
how the long run works | the term long run is used to describe an economic situation in which a manufacturer or producer is flexible in its production decisions this situation is characterized by variable inputs including capital labor materials and equipment among others businesses can either expand or reduce production capacity when there is a long run there is also the chance to enter or exit an industry based on expected profits firms understand that they cannot change their levels of production in order to reach an equilibrium between supply and demand in macroeconomics the long run is the period when the general price level contractual wage rates and expectations adjust fully to the state of the economy this stands in contrast to the short run when these variables may not fully adjust long run models may also shift away from short run equilibrium in which supply and demand react to price levels with more flexibility firms can change production levels in response to expected economic profits for example a firm may implement change by increasing or decreasing the scale of production in response to profits or losses which may entail building a new plant or adding a production line the long run doesn t refer to a specific period of time rather it is specific to the firm industry or economic factor studied long run and the long run average cost lrac over the long run a firm will search for the production technology that allows it to produce the desired level of output at the lowest cost if a company is not producing at its lowest cost possible it may lose market share to competitors that are able to produce and sell at minimum cost the long run is associated with the long run average cost lrac the average cost of output feasible when all factors of production are variable the lrac curve is the curve along which a firm would minimize its cost per unit for each respective quantity of output in the long run the lrac curve is comprised of a group of short run average cost srac curves each of which represents one specific level of fixed costs the lrac curve will therefore be the least expensive average cost curve for any level of output as long as the lrac curve is declining then internal economies of scale are being exploited the long run average cost can also be called the long run average total cost economies of scale refer to the situation wherein as the quantity of output goes up the cost per unit goes down in effect economies of scale are the cost advantages that are achieved when there is an expansion of the size of production the cost advantages translate to improved efficiency in production which can give a business a competitive advantage in its industry of operations which in turn could translate to lower costs and higher profits for the business if lrac is falling when output is increasing then the firm is experiencing economies of scale when lrac eventually starts to rise then the firm experiences diseconomies of scale and if lrac is constant then the firm is experiencing constant returns to scale long run vs short runthe long run is the opposite of the short run this is an economic situation wherein firms want to meet a goal or target within a short period of time when demand for a product or service increases unlike the long run the short run involves at least one factor of production that is fixed while all the others are variable while the costs are fixed so there is no equilibrium between these factors this means there is no flexibility when it comes to the inputs or outputs since the costs are fixed while ordinary profits are typical of the long run the short run allows firms to realize economic or exceptional profits example of a long runhere s a hypothetical example to show how the long run works suppose a business has a one year lease this firm s long run is defined as any period longer than a year since it s not bound by the lease agreement after that period of time in the long run the amount of labor size of the factory and production processes can be altered if needed to suit the needs of the business or lease issuer | |
why is the long run important in economics | the long run is an economic situation where all factors of production and costs are variable it demonstrates how well run and efficient firms can be when all of these factors change | |
what eliminates economic profits in the long run | there is perfect competition in the long run this means that firms can easily enter the market since there is the possibility of having an infinite number of competing firms in the same space profits can easily be eliminated keep in mind though that companies can also easily leave the market wiping out losses too | |
what are some of the benefits of the long run | since the costs are variable in the long run firms have the option to make adjustments to the way it operates so when the need arises it can increase or decrease operations furthermore they can decide how best to shape their factors of production in order to reduce costs the bottom linethe long run is a situation where companies can operate under variable production factors because these inputs aren t fixed costs are also variable this allows a greater degree of flexibility because companies can make adjustments to their production levels and how they operate to keep costs down but there is a downfall there is usually perfect competition which means there is no chance for exceptional profits | |
what is long straddle | the long straddle is an options strategy where the trader purchases a long call and a long put on the same underlying asset with the same expiration date and strike price the goal is to profit from a strong move in either direction by the underlying asset following a market event understanding long straddlesthe long straddle strategy bets that the underlying asset will move significantly in price either higher or lower the profit profile is the same no matter which way the asset moves typically the trader thinks the underlying asset will move from a low volatility state to a high volatility state based on the imminent release of new information the strike price is at the money or as close to it as possible since calls benefit from an upward move and a put benefits from a downward move in the underlying security both of these components cancel out small moves in either direction the goal of a long straddle is to profit from a strong move in either direction by the underlying asset traders may use a long straddle ahead of a significant event that impacts a company such as | |
when the event occurs bullish or bearish activity is commonly unleashed this causes the underlying asset to move quickly | an options contract can last weeks or years depending on the expiration date 1long straddle riskthe risk inherent in the long straddle strategy is that the market may not react strongly enough to the anticipated event prices of put and call options also inflate in anticipation of the event this means the cost of attempting the strategy is much higher than solely betting on one direction sellers recognize that there is increased risk built into a scheduled news making event and raise prices if the event does not generate a strong move in either direction for the underlying security then the options purchased likely will expire worthless and create a loss calculating profitas the price of the underlying asset increases the potential profit is unlimited if the price of the underlying asset goes to zero the profit would be the strike price less the premiums paid for the options the maximum risk is the total cost to enter the position which is the price of the call option plus the price of the put option the maximum loss is the total for the net premium paid plus any trade commissions this loss occurs when the price of the underlying asset equals the strike price of the options at expiration the profit when the price of the underlying asset is increasing is the profit when the price of the underlying asset is decreasing is example of a long straddlea stock is priced at 50 per share a call option with a strike price of 50 is at 3 and the cost of a put option with the same strike is also 3 an investor enters into a straddle by purchasing one of each option the option sellers assume a 70 probability that the move in the stock will be 6 or less in either direction profit occurs at expiration if the stock is priced above 56 or below 44 regardless of how it was initially priced the maximum loss of 6 for one call and one put contract occurs only if the stock is priced precisely at 50 on the close of the expiration day the trader will experience less loss if the price is between 44 and 56 per share the trader will experience gain if the stock is higher than 56 or lower than 44 if for example the stock moves to 65 at expiration the position profit is 9 65 50 6 9 | |
what is long straddle using implied volatility | many traders suggest using the long straddle to capture the anticipated rise in implied volatility by initiating this strategy in the period leading up to the event but closing it before the occurrence of the event this method attempts to profit from the increasing demand for the options themselves | |
how do options buyers choose an expiration date | an options buyer chooses the expiration date based on cost and the length of the contract options can range from a week to several years the farther out the expiration date the more expensive the option 1 | |
what is a synthetic put | a synthetic put is an options strategy that combines a short stock position with a long call option on that same stock to mimic a long put option it s also called a synthetic long put essentially an investor who has a short position in a stock purchases an at the money call option on that same stock this action is taken to protect against appreciation in the stock s price a synthetic put is also known as a married call or protective call understanding synthetic putsthe synthetic put is a strategy that investors can utilize when they have a bearish bet on a stock and are concerned about potential near term strength in that stock it is similar to an insurance policy except that the investor wants the price of the underlying stock to fall not rise the strategy combines the short sale of a security with a long call position on the same security a synthetic put mitigates the risk that the underlying price will increase it does not however deal with other dangers which may leave the investor exposed because it involves a short position in the underlying stock it carries with it all those associated risks fees margin interest and the possibility of having to pay dividends to the investor from whom the shares were borrowed to sell short institutional investors can use synthetic puts to disguise their trading bias be it bullish or bearish on specific securities however for most investors synthetic puts are best suited for use as an insurance policy an increase in volatility would be beneficial to this strategy while time decay would impact it negatively the maximum profit for both a simple short position and a synthetic put is if the stock s value falls to zero note that any benefit from a synthetic put must be weighted against the options premium a synthetic put strategy helps protect against an increase in the stock s price effectively putting a cap on the stock price the cap limits upside risk for the investor i e the risk that the short position s stock price rises the risk of a synthetic put strategy is limited to the difference between the price at which the underlying stock was shorted and the option s strike price as well as any commissions put another way at the time of the purchase of the option if the price at which the investor shorted the stock was equal to the strike price the loss for the strategy would be the premiums paid for the option | |
when to use a synthetic put | rather than a profit making strategy a synthetic put is a capital preserving strategy with that the cost of the call portion the option premium becomes a built in cost the option s price reduces the profitability of the method assuming the underlying stock moves in the desired direction lower thus synthetic puts are often used as insurance policies against short term spikes in stock prices in an otherwise bearish stock or as a protection against an unforeseen move upward in the stock price newer investors may benefit from knowing that their losses in the stock market are limited this safety net can give them confidence as they learn more about different investing strategies of course any protection will come at a cost which includes the price of the option commissions and other possible fees | |
what is the long tail | the long tail is a business strategy that allows companies to realize significant profits by selling low volumes of hard to find items to many customers instead of only selling large volumes of a reduced number of popular items the term was first coined in 2004 by chris anderson who argued that products in low demand or with low sales volume can collectively make up market share that rivals or exceeds the relatively few current bestsellers and blockbusters but only if the store or distribution channel is large enough long tail may also refer to a type of liability in the insurance industry or to tail risk found in investment portfolios this definition deals with the business strategy use of the term understanding the long tail strategychris anderson is a british american writer and editor most notably known for his work at wired magazine in 2004 anderson coined the phrase long tail after writing about the concept in wired magazine where he was editor in chief in 2006 anderson also wrote a book titled the long tail why the future of business is selling less of more the long tail concept considers less popular goods that are in lower demand anderson argues that these goods could actually increase in profitability because consumers are navigating away from mainstream markets this theory is supported by the growing number of online marketplaces that alleviate the competition for shelf space and allow an unmeasurable number of products to be sold specifically through the internet anderson s research shows the demand overall for these less popular goods as a comprehensive whole could rival the demand for mainstream goods while mainstream products achieve a greater number of hits through leading distribution channels and shelf space their initial costs are high which drags on their profitability in comparison long tail goods have remained in the market over long periods of time and are still sold through off market channels these goods have low distribution and production costs yet are readily available for sale long tail probability and profitabilitythe long tail of distribution represents a period in time when sales for less common products can return a profit due to reduced marketing and distribution costs overall long tail occurs when sales are made for goods not commonly sold these goods can return a profit through reduced marketing and distribution costs the long tail also serves as a statistical property that states a larger share of population rests within the long tail of a probability distribution as opposed to the concentrated tail that represents a high level of hits from the traditional mainstream products highly stocked by mainstream retail stores the head and long tail graph depicted by anderson in his research represents this complete buying pattern the concept overall suggests the u s economy is likely to shift from one of mass market buying to an economy of niche buying all through the 21st century | |
what is long term | long term refers to the extended period of time that an asset is held depending on the type of security a long term asset can be held for as little as one year or for as long as 30 years or more generally speaking long term investing for individuals is often thought to be in the range of at least seven to 10 years of holding time although there is no absolute rule understanding long term long term is one of those phrases that is so ubiquitous in finance that it has become difficult to pin down a specific meaning the media frequently advises people to invest for the long term but determining whether or not an investment is long term is very subjective a day trader for example would define long term much differently than a buy and hold investor for the day trader a position held overnight would be a long term commitment for the buy and hold investor anything less than several years may be considered short term long term investing for companiesa long term investment is found on the asset side of a company s balance sheet representing the company s investments including stocks bonds real estate and cash that it intends to hold for more than a year 2 | |
when a firm purchases shares of stock or another company s debt as investments determining whether to classify it as short term or long term affects the way those assets are valued on the balance sheet | short term investments are marked to market and any declines in their value are recognized as a loss however increases in value are not recognized until the item is sold this means that classifying an investment as long or short term has a direct impact on the reported net income of the company holding the investment analysts look for changes in long term assets as a sign that a company may be liquidating to cover current expenses generally a problem if it continues long term investing for individualsfor many individuals saving and investing for retirement represents their main long term project while it is true that there are other expenses that require a multi year effort such as buying a car or buying and paying off a house retirement is the main reason most people have a portfolio in this case we are encouraged to start early and invest often real estate is often considered to be a long term investment individuals that buy a house usually sell it many years after they have bought it or they own it until the mortgage is fully paid off profitable securities sold after a year are subject to capital gains tax as opposed to ordinary income tax for securities sold under a year 1stocks mutual funds and exchange traded funds etfs can either be long term or short term investments depending on how long they are held for 3 an individual can buy a stock and sell it if it appreciates in a few weeks or months conversely the same stock can be held for years and sold until it has appreciated even more using both a long term outlook and the power of compounding individual investors can use the years they have between themselves and retirement to take prudent risks when your time horizon is measured in decades market downturns and other risks can be taken for the long term rewards of a higher overall return | |
what is considered a long term investment | long term investments are any securities that are held for more than a year generally these can include stocks bonds real estate mutual funds and exchange traded funds etfs | |
what are the characteristics of a long term investment strategy | a long term investment strategy aims to hold an investment security for a year or more long term investment strategies come with a higher amount of risk due to the unpredictability of future outcomes furthermore the goal is price appreciation over a long period rather than immediately which means riding out dips in a security s price long term investments should also be part of a diversified portfolio to reduce long term volatility | |
is gold a good long term investment | gold has long been considered a good investment to hedge against inflation as well as a store of value however data has shown that both stocks and bonds have outperformed gold in the long term on average 4 depending on the specific period however gold can outperform stocks and bonds | |
what are long term marketable securities | marketable securities can be most investments including stocks bonds and exchange traded funds etfs marketable securities are considered current assets and are expected to be sold in less than a year usually a few months these types of securities are typically liquid securities that can be sold easily as there is a large number of buyers | |
why are long term securities less liquid | long term securities are less liquid because they need to be held for a longer time to realize a profit in many cases they are also not easily sold for example a house is considered a long term investment one that takes time to appreciate and that cannot be sold quickly bonds with longer maturities also have higher payouts over time but need to be held longer for a higher yield | |
what is long term | long term refers to the extended period of time that an asset is held depending on the type of security a long term asset can be held for as little as one year or for as long as 30 years or more generally speaking long term investing for individuals is often thought to be in the range of at least seven to 10 years of holding time although there is no absolute rule understanding long term long term is one of those phrases that is so ubiquitous in finance that it has become difficult to pin down a specific meaning the media frequently advises people to invest for the long term but determining whether or not an investment is long term is very subjective a day trader for example would define long term much differently than a buy and hold investor for the day trader a position held overnight would be a long term commitment for the buy and hold investor anything less than several years may be considered short term long term investing for companiesa long term investment is found on the asset side of a company s balance sheet representing the company s investments including stocks bonds real estate and cash that it intends to hold for more than a year 2 | |
when a firm purchases shares of stock or another company s debt as investments determining whether to classify it as short term or long term affects the way those assets are valued on the balance sheet | short term investments are marked to market and any declines in their value are recognized as a loss however increases in value are not recognized until the item is sold this means that classifying an investment as long or short term has a direct impact on the reported net income of the company holding the investment analysts look for changes in long term assets as a sign that a company may be liquidating to cover current expenses generally a problem if it continues long term investing for individualsfor many individuals saving and investing for retirement represents their main long term project while it is true that there are other expenses that require a multi year effort such as buying a car or buying and paying off a house retirement is the main reason most people have a portfolio in this case we are encouraged to start early and invest often real estate is often considered to be a long term investment individuals that buy a house usually sell it many years after they have bought it or they own it until the mortgage is fully paid off profitable securities sold after a year are subject to capital gains tax as opposed to ordinary income tax for securities sold under a year 1stocks mutual funds and exchange traded funds etfs can either be long term or short term investments depending on how long they are held for 3 an individual can buy a stock and sell it if it appreciates in a few weeks or months conversely the same stock can be held for years and sold until it has appreciated even more using both a long term outlook and the power of compounding individual investors can use the years they have between themselves and retirement to take prudent risks when your time horizon is measured in decades market downturns and other risks can be taken for the long term rewards of a higher overall return | |
what is considered a long term investment | long term investments are any securities that are held for more than a year generally these can include stocks bonds real estate mutual funds and exchange traded funds etfs | |
what are the characteristics of a long term investment strategy | a long term investment strategy aims to hold an investment security for a year or more long term investment strategies come with a higher amount of risk due to the unpredictability of future outcomes furthermore the goal is price appreciation over a long period rather than immediately which means riding out dips in a security s price long term investments should also be part of a diversified portfolio to reduce long term volatility | |
is gold a good long term investment | gold has long been considered a good investment to hedge against inflation as well as a store of value however data has shown that both stocks and bonds have outperformed gold in the long term on average 4 depending on the specific period however gold can outperform stocks and bonds | |
what are long term marketable securities | marketable securities can be most investments including stocks bonds and exchange traded funds etfs marketable securities are considered current assets and are expected to be sold in less than a year usually a few months these types of securities are typically liquid securities that can be sold easily as there is a large number of buyers | |
why are long term securities less liquid | long term securities are less liquid because they need to be held for a longer time to realize a profit in many cases they are also not easily sold for example a house is considered a long term investment one that takes time to appreciate and that cannot be sold quickly bonds with longer maturities also have higher payouts over time but need to be held longer for a higher yield | |
what is long run average total cost lratc | long run average total cost lratc is a business metric that represents the average cost per unit of output over the long run where all inputs are considered to be variable and the scale of production is changeable the long run average cost curve shows the lowest total cost to produce a given level of output in the long run long term unit costs are almost always less than short term unit costs because in a long term time frame companies have the flexibility to change big components of their operations such as factories to achieve optimal efficiency a goal of both company management and investors is to determine the lower bounds of lratc understanding long run average total costfor instance if a manufacturing company builds a new larger plant for production it is assumed that the lratc per unit would eventually become lower than at the old plant as the company takes advantage of certain economies of scale or the cost advantages that come from expanding the scale of production when the scale of production is expanded average costs are reduced production becomes more efficient and a company can become more competitive in the market this can lead to both lower prices and larger profits which can be beneficial for both consumers and producers this is known as a positive sum game | |
how to visualize long run average total cost | the calculation of the lratc may be represented as a curve showing the lowest costs that a company will be able to reach for any degree of output over time the shape of that curve can closely resemble the curve calculated for short run average total costs the lratc can be seen as made up of a series of short run curves as a company improves its efficiency the curve itself can be divided into three segments or phases during the economies of scale at the beginning of the curve costs are reduced as the company grows more efficient and its production costs diminish the first iterations of product development and assembly carry costs that will largely be greater at the onset as more factories and production lines are introduced the nature of costs shifts more towards the ongoing manufacturing of the product the burden of those expenditures diminishes as it becomes easier for the company to repeat and replicate its operations eventually the company will experience constant returns to scale as it pushes closer to peak efficiency cost of acquisition for raw materials can be reduced by making such purchases in increasingly growing quantities furthermore the processes the company uses to make its product can become more stable and streamlined as it develops a rhythm and pace for its production flow if the company continues to scale up production it will reach the part of the curve where diseconomies of scale become a factor and costs rise though a company might streamline operations it might see new layers of bureaucracy and management introduced which can slow overall production and decision making the more the operation grows at this stage the costs will rise as the operation loses efficiency example of long run average total costfor example in the video game industry the costs to produce a game are high however the cost of making copies of a game once produced is marginal so once a company can establish itself expand the customer base for a specific game and raise demand for that game the extra output required to meet that demand lowers overall cost in the long run | |
what is long short equity | long short equity is an investing strategy that takes long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline a long short equity strategy seeks to minimize market exposure while profiting from stock gains in the long positions along with price declines in the short positions although this may not always be the case the strategy should be profitable on a net basis long short equity is a liquid alternative strategy popular with hedge funds many of which employ a market neutral strategy in which dollar amounts of both long and short positions are equal investopedia michela buttignol | |
how long short equity works | long short equity works by exploiting profit opportunities in both potential upside and downside expected price moves this strategy identifies and takes long positions in stocks identified as being relatively underpriced while selling short stocks that are deemed to be overpriced while many hedge funds also employ a long short equity strategy with a long bias such as 130 30 where long exposure is 130 and short exposure is 30 comparatively fewer hedge funds employ a short bias to their long short strategy it is historically more difficult to uncover profitable short ideas than long ideas long short equity strategies can be differentiated from one another in a number of ways by market geography advanced economies emerging markets europe etc sector energy technology etc investment philosophy value or growth and so on an example of a long short equity strategy with a broad mandate would be a global equity growth fund while an example of a relatively narrow mandate would be an emerging markets healthcare fund long short equity vs equity market neutrala long short equity fund differs from an equity market neutral emn fund in that the latter attempts to exploit differences in stock prices by being long and short in closely related stocks that have similar characteristics an emn strategy attempts to keep the total value of their long and short holdings roughly equal as this helps to lower the overall risk to maintain this equivalency between long and short equity market neutral funds must rebalance as market trends establish and strengthen so as other long short hedge funds let profits run on market trends and even leverage up to amplify them equity market neutral funds are actively staunching returns and increasing the size of the opposite position when the market inevitably turns again equity market neutral funds again whittle down the position that should profit to move more into the portfolio that is suffering a hedge fund with an equity market neutral strategy is generally aiming itself at institutional investors who are shopping for a hedge fund that can outperform bonds without carrying the high risk and high reward profile of more aggressive funds long short equity example the pair tradea popular variation of the long short model is that of the pair trade which involves offsetting a long position on a stock with a short position on another stock in the same sector for example an investor in the technology space may take a long position in microsoft and offset that with a short position in intel if the investor buys 1 000 shares of microsoft at 33 each and intel is trading at 22 the short leg of this paired trade would involve purchasing 1 500 intel shares so that the dollar amounts of the long and short positions are equal the ideal situation for this long short strategy would be for microsoft to appreciate and for intel to decline if microsoft rises to 35 and intel falls to 21 the overall profit on this strategy would be 3 500 even if intel advances to 23 since the same factors typically drive stocks up or down in a specific sector the strategy would still be profitable at 500 although much less so to get around the fact that stocks within a sector generally tend to move up or down in unison long short strategies frequently tend to use different sectors for the long and short legs for example if interest rates are rising a hedge fund may short interest sensitive sectors such as utilities and go long on defensive sectors such as healthcare | |
what is a long short fund | a long short fund is a type of mutual hedge or exchange traded fund etf that takes both long and short positions in investments essentially they take long positions in stocks they expect to increase in value and short positions in stocks they think are headed lower these funds often use investing techniques leverage derivatives short positions and more first used by hedge funds and then taken up by mutual funds and etfs later as the name suggests most hedge funds are of this type while the financial industry regulatory authority finra lists 176 mutual funds and etfs in this category 1 long short funds are also called enhanced or 130 30 funds understanding long short fundslong short funds aim to boost returns by investing in specific markets and employing both long and short positions due to the active management expertise and analysis required these funds typically have higher expense ratios as of 2024 the average expense ratio for long short funds listed in the finra database is 1 98 compared with 0 42 for all equity mutual funds in 2023 23like their long short hedge fund counterparts these mutual funds and etfs use similar strategies but with notable differences they offer a comparable mix of investments balancing higher risk and the potential for greater returns against standard benchmarks most long short funds provide higher liquidity than long short hedge funds have no lock in periods and have relatively lower fees however they still maintain higher expense ratios and lower liquidity than other public funds in addition many of these funds require larger minimums to get started and are among the 9 of mutual funds that impose front and back end loads commissions 2historically mutual funds and etfs particularly those employing long short strategies had limits on the leverage and risks they could undertake dating to the great depression these restrictions protect average investors who might not fully grasp the complexities of these financial instruments despite the loosening of some rules over the years oversight remains stringent to safeguard public investors from undue risks 4long short funds can be a good investment for investors seeking targeted index exposure with some active management as long as you know the risks involved long short funds also offer the ability to hedge against changing markets and other trends that better managers can adjust for the 130 30 strategythe most common long short strategy is to be long 130 and short 30 130 30 100 of assets under management 5 for example a fund manager might rank the expected returns for s p 500 stocks from best to worst a fund management team accesses massive amounts of data and uses quantitative rules to rank the stocks the selection criteria could include total returns risk adjusted performance or relative strength for a given period six months a year or what have you the manager could then invest 100 in the top ranked stocks and short sell the bottom ranking stocks up to 30 of the portfolio s value earnings from the short sales would be reinvested in the top ranking stocks allowing for greater exposure to their rising prices 5examples of long short fundslet s take a look at two examples to clarify how two funds in this category can still spread their assets very differently the aqr long short equity fund has been one of the better long term performers in the long short equity fund space the fund invests in companies across the globe and in many sectors as seen in the chart below you can see the percentage of its long and short holdings in each industry the fund had annualized total returns of 23 04 13 32 and 10 6 over the previous three five and ten years up until the end of the first quarter of 2024 it had an annual expense ratio of 4 35 6investopediathe invesco s p 500 downside hedged etf phdg is an actively managed etf that aims for positive returns in both up and down markets whatever the trends of stocks and bonds the etf is a good contrast with qleix in how a long short fund can use very different ways to hedge against downside risks while qleix is typically short in the same sectors it s gone long phdg distributes its assets across the components of the s p 500 dynamic veqtor index the latter contains equity representing the s p 500 index a volatility hedge as represented by the s p 500 vix short term futures index and cash a chart showing its holdings is below invesco says its fund tracks the performance of the broader equity markets while providing a hedge against implied volatility the fund adjusts its exposure based on the equity and volatility of the s p 500 index the fund s expense ratio was 0 39 in april 2024 relatively low for an actively managed fund though it has features of an index fund which generally costs less meanwhile it had three five and 10 year returns of 4 41 7 05 and 4 69 respectively investopedia | |
what is the difference between long and short investing | long investing is buying securities with the aim of later selling them at a higher price short investing meanwhile involves borrowing stock from a broker selling it then repurchasing it back at a lower price to return it to the broker the aim is to profit from a security going down in value 7 | |
what are other investments that are like long short funds | most broadly options and other derivatives trading are often used to hedge against the downside risks of equities however long short funds build this in market neutral funds attempt to profit from price differences between stocks while minimizing overall market exposure they take long and short positions in carefully matched stocks to hedge broader market risks there s pairs trading where you take a long position in one stock and a simultaneous short position in a closely related stock the goal is to profit from temporary discrepancies in their prices 8 | |
why is going short riskier than going long | short selling is considered riskier mainly because there is no limit to how high the security can rise in price when you take a long position your downside is limited to 100 when short selling there is no limit 5the bottom linelong short funds don t simply invest in stocks deemed undervalued these funds stand out because they also engage in short selling making money from prices depreciating in value this extra activity increases the prospects for greater returns but comes at a cost long short funds are generally riskier than regular mutual funds have higher fees and offer less liquidity | |
what is a long tail liability | a long tail liability is a type of liability that carries a long settlement period long tail liabilities are likely to result in high incurred but not reported ibnr claims because it may take a long period of time for the claims to be settled understanding a long tail liabilitywhether a settlement period for an insurance claim is considered a long tail liability or short term varies according to the type of risk being covered property insurance claims tend to be settled relatively quickly while liability insurance claims are often classified as long tail liabilities liability insurance providers often see new claims being filed a long time after the claim event occurred the long settlement period or long tail liability can occur for a variety of reasons including financial impact of long tail liabilitiesinsurance companies that offer coverage for risks that are considered long tail may have higher investment income ratios net investment income earned premiums than companies that offer coverage for short term liabilities the investment income ratio is used to determine an insurance company s profitability insurance companies typically invest the premiums they receive from their customers policies that cover long tail risks have a larger gap between the time premiums are collected versus when claims are paid as a result long tail insurance providers have more time to invest their premiums allowing them more time to earn a higher rate of return however policies covering long tail liabilities tend to have higher loss ratios losses incurred divided by earned premiums and higher combined ratios losses and loss adjustment expenses divided by earned premium the combined ratio also helps to determine the profitability of an insurer the ratio includes the premiums collected claims paid and any claim related expenses a combined ratio below 100 indicates that the insurer is making a profit while a ratio above 100 means the company is paying out more in claims than its collecting in premiums special considerationssince it can be years or even decades before a claim is made and makes its way through courts proper record keeping is imperative companies that face the potential of long tail liability claims should be careful with old records and keep them until an effort has been made to determine if insurance policies or evidence of insurance policies is among them if a company is unable to locate an old liability policy it must rely instead on secondary evidence to show that a policy existed and that it was lost or destroyed without intent to defraud the insurer such evidence could include corporate minutes accounting ledgers annual reports internal memoranda transactional records and even personal appointment calendars but nothing is more important than locating the policy number itself examples of long tail liability claimsalthough the type of claim and the length of the settlement process can vary below are some of the most common long tail liability claims | |
what are long term assets | long term assets are assets whether tangible or non tangible that will benefit the company for more that one year also known as non current assets long term assets can include fixed assets such as a company s property plant and equipment but can also include other assets such as long term investments patents copyright franchises goodwill trademarks and trade names as well as software long term assets are reported on the balance sheet and are usually recorded at the price at which they were purchased and so do not always reflect the current value of the asset long term assets can be contrasted with current assets which can be conveniently sold consumed used or exhausted through standard business operations with one year understanding long term assetslong term assets are those held on a company s balance sheet for many years long term assets can include tangible assets which are physical and also intangible assets that cannot be touched such as a company s trademark or patent there is no standardized accounting formula that identifies an asset as being a long term asset but it is commonly assumed that such an asset must have a useful life of more than one year some examples of long term assets include changes observed in long term assets on a companies balance sheet can be a sign of capital investment or liquidation if a company is investing in its long term growth it will use revenues to make more asset purchases designed to drive earnings in the long run however investors must be aware that some companies will sell their long term assets in order to raise cash to meet short term operational costs or pay the debt which can be a warning sign that a company is in financial difficulty current vs long term assetsthe two main types of assets appearing on the balance sheet are current and non current assets current assets on the balance sheet contain all of the assets and holdings that are likely to be converted into cash within one year companies rely on their current assets to fund ongoing operations and pay current expenses such as accounts payable current assets will include items such as cash inventories and accounts receivables non current assets are long term assets that have a useful life of more than one year and usually last for several years long term assets are considered to be less liquid meaning they can t be easily liquidated into cash depreciation of long term assetsdepreciation is an accounting convention that allows companies to expense a portion of long term operating assets used in the current year it is a non cash expense that increases net income but also helps to match revenues with expenses in the period in which they are incurred capital assets such as plant and equipment pp e are included in long term assets except for the portion designated to be depreciated expensed in the current year long term assets can be depreciated based on a linear or accelerated schedule and can provide a tax deduction for the company analysts will often consider a company s earnings before the depreciation of assets e g ebitda as a key factor in understanding their financial situation since depreciation can obscure the true value of long term assets on their affect on a company s profitability limitations of long term assetslong term assets can be expensive and require large amounts of capital that can drain a company s cash or increase its debt a limitation with analyzing a company s long term assets is that investors often will not see their benefits for a long time perhaps years to come investors are left to trust the management team s ability to map out the future of the company and allocate capital effectively not all long term assets drive earnings drug companies invest billions of dollars in r d researching new drugs but only a few come to market and are profitable as with analyzing any financial metric investors should take a holistic view of a company with respect to its long term assets it s best to utilize multiple financial ratios and metrics when performing a financial analysis of a company real world examplebelow is a portion of exxon mobil corporation s xom balance sheet as of september 30 2018 | |
what is a long term capital gain or loss | a long term capital gain or loss for tax purposes is the gain or loss stemming from the sale of an investment that was held for longer than 12 months before it was sold investments that are held for less than 12 months are reported as short term capital gains or losses long term capital gains generally get more favorable tax treatment than short term gains capital losses short or long get the same tax treatment understanding long term capital gain or lossthe gain or loss in an investment is the difference in value between the sale price and the purchase price this number is either the net profit or loss the investor experienced when selling the asset the internal revenue service irs distinguishes between long term and short term capital gains and taxes them differently long term gains are taxed at 0 to 20 depending on the taxpayer s income tax bracket short term gains are taxed as ordinary income which is a higher percentage for most taxpayers capital losses short term or long term are treated the same taxpayers report their capital gains and losses for the year when they file their tax returns gains and losses are recorded on schedule d 1you can deduct a significant capital loss over a period of years the annual limit is a deduction of 3 000 this is called carrying forward a loss 2example of long term capital gains and lossesimagine melanie grant is filing her taxes and she has a long term capital gain from the sale of her shares of stock for technet limited melanie purchased these shares a few years ago during the initial offering period for 175 000 and sold them this year for 220 000 she has a long term capital gain of 45 000 which will be taxed at the capital gains tax rate the sale of your primary home is taxed differently even if you made gains on the sale if you meet the eligibility requirements you can exclude up to 500 000 of the home s sale from gains 3now assume she is also selling the vacation home she purchased less than one year ago for 80 000 she has not owned the property for very long so she has not gathered much equity in it when she sells it only a few months later she receives 82 000 this presents her with a short term capital gain of 2 000 unlike the sale of her long held shares of stock this profit will be taxed as income adding 2 000 to her annual income calculation if melanie had instead sold her vacation home for 78 000 experiencing a short term loss she could have used that 2 000 to offset some of her tax liability for the 45 000 long term capital gains she had experienced can you deduct a long term capital loss the internal revenue service lets you deduct and carry over to the next tax year any capital losses you can only claim the lessor of 3 000 1 500 if you re married filing separately or your total net loss in a given year you can do that in every subsequent year until the loss is fully accounted for 1 | |
is there a limit on long term capital losses | there is no limit on how much you can lose but there is a limit on what you can claim as a capital loss deduction in a single year if you have a capital loss of more than 3 000 you can deduct 3 000 and carry it over the rest to subsequent tax years 2 | |
does the irs track capital loss carryover | you re allowed to deduct up to 3 000 in capital losses per year carrying over any remaining losses into the following year or years so if you ve experienced 9 000 in capital losses each year for three years you can deduct 3 000 from your income to offset the loss 2the bottom linethe irs gives you a tax break for holding investments for at least a year by reducing the taxes on the profits you make from their sale you can also deduct or carry over to the next tax year up to 3 000 in capital losses then 3 000 again the following year and so on until you ve claimed all the losses | |
what was long term capital management ltcm | long term capital management ltcm was a large hedge fund led by nobel prize winning economists and renowned wall street traders that blew up in 1998 forcing the u s government to intervene to prevent financial markets from collapsing understanding long term capital management ltcm from its start in 1994 ltcm was wildly successful attracting about 3 5 billion of investor capital by the spring of 1998 with the promise of an arbitrage strategy that could take advantage of temporary changes in market behavior and theoretically reduce the risk level to zero 12however ltcm s highly leveraged trading strategies failed to pan out and it suffered monumental losses the reverberations were felt across the financial landscape and nearly collapsed the global financial system in 1998 ultimately the u s government had to step in and arrange a bailout of ltcm by a consortium of wall street banks in order to prevent systemic contagion 2ltcm started with just over 1 billion in initial assets and focused on bond trading the trading strategy of the fund was to make convergence trades which involve taking advantage of arbitrage opportunities between securities to be successful these securities must be incorrectly priced relative to one another at the time of the trade 3an example of an arbitrage trade would be a change in interest rates not yet adequately reflected in securities prices this could open opportunities to trade such securities at values different from what they will soon become once the new rates have been priced in ltcm was formed in 1994 and was founded by renowned salomon brothers bond trader john meriwether along with nobel prize winning myron scholes of the black scholes model 3ltcm also dealt in interest rate swaps which involve the exchange of one series of future interest payments for another based on a specified principal among two counterparties often interest rate swaps consist of changing a fixed rate for a floating rate or vice versa in order to minimize exposure to general interest rate fluctuations due to the small spread in arbitrage opportunities ltcm had to leverage itself highly to make money at the fund s height in 1998 ltcm had approximately 5 billion in assets controlled over 100 billion and had derivative positions whose total worth was over 1 trillion at the time ltcm also had borrowed more than 155 billion in assets 13long term capital management ltcm demise | |
when russia defaulted on its debt in august 1998 ltcm was holding a significant position in russian government bonds known by the acronym gko despite the loss of hundreds of millions of dollars per day ltcm s computer models recommended that it hold its positions | ltcm s highly leveraged nature coupled with a financial crisis in russia led the hedge fund to sustain massive losses and be in danger of defaulting on its own loans this made it difficult for ltcm to cut its losses in its positions ltcm held huge positions totaling roughly 5 of the total global fixed income market and had borrowed massive amounts of money to finance these leveraged trades 4if ltcm had gone into default it would have triggered a global financial crisis due to the massive write offs its creditors would have had to make |
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