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Wednesday, January 19, 2011

ECONOMIC GLOSSARY

FIRST-ORDER AUTO-CORRELATION
A measure of to what extent the level of economic activity currently depends upon the level in the past. The higher the degree of dependence the longer or more persistent the business cycle will be.

HEDGE FUND
A pooled investment vehicle that is privately organised and is administered by professional investment managers. It is different from another pooled investment fund, the mutual fund, in that access is available only to wealthy individuals and institutional managers. Moreover, hedge funds are able to sell securities short and buy securities on leverage, which is consistent with their typically short-term and high risk oriented investment strategy, based primarily on the active use of derivatives and short positions. US hedge funds are exempt from Securities and Exchange Commission reporting requirements, as well as from regulatory restrictions concerning leverage or trading strategies.


IMPLIED VOLATILITY
Implied volatility is the value of the expected volatility imputed from an option pricing model such as the Black-Scholes formula, given the option price, the asset’s price, the exercise price, the time to maturity, and the risk-free interest rate.


MOST FAVOURED NATION (MFN) PRINCIPLE
A principle of non discrimination embodied in Article 1 of the General Agreement on Tariffs and Trade (GATT), whereby any concession or privilege granted by one contracting party to GATT to a product of another contracting party will be unconditionally granted to the like product of all other contracting parties. In practice, MFN treatment is no longer limited to GATT contracting parties but applicable to other trading partners within the World Trade Organization (WTO).


REPURCHASE AGREEMENT (OR REPO)
The sale of a security on the condition that the seller agrees to repurchase it at a future date at a fixed price. Securities are sold to the investor and at the same time an agreement is established to repurchase them at some point in the near future at the same price, but with a provision for interest to be paid to the investor at the end of the transaction, the reporate.


TOBIN TAX
Tobin tax is the header commonly given to the proposal for levying all foreign exchange transactions. James Tobin first laid out such a proposal in the wake of the breakdown of the Bretton-Woods system of exchange rates. Recent interpretations of the proposal, while described as a "Tobin tax" have been at variance with the original idea, a point made by Tobin himself.