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FOLLOWING NEWS
RANGE TRADING
TREND TRADING
SCALPING
COMMODITY FUTURES
LEVERAGE
CURRENCY BAND
EXCHANGE RATES
FLOATING EXCHANGE RATE
FIXED EXCHANGE RATE
LINKED EXCHANGE RATE
CURRENCY SWAP
LIQUIDITY
MARKET SPECULATORS
LAVERAGE
In finance, leverage is borrowing money to supplement existing funds for
investment in such a way that the potential positive or negative outcome is
magnified and/or enhanced. It generally refers to using borrowed funds, or debt,
so as to attempt to increase the returns to equity. Deleveraging is the action
of reducing borrowings. Financial leverage Financial leverage takes the form of
a loan or other borrowings, the proceeds of which are reinvested with the intent
to earn a greater rate of return than the cost of interest. If the firm's rate
of return on assets is higher than the rate of interest on the loan, then its
return on equity will be higher than if it did not borrow because assets =
equity + debt. On the other hand, if the firm's ROA is lower than the interest
rate, then its ROE will be lower than if it did not borrow. Leverage allows
greater potential returns to the investor than otherwise would have been
available but the potential for loss is also greater because if the investment
becomes worthless, the loan principal and all accrued interest on the loan still
need to be repaid. Margin buying is a common way of utilizing the concept of
leverage in investing. An unleveraged firm can be seen as an all-equity firm,
whereas a leveraged firm is made up of ownership equity and debt. A firm's debt
to equity ratio is therefore an indication of its leverage. As is true of
operating leverage, the degree of financial leverage measures the effect of a
change in one variable on another variable. Degree of financial leverage may be
defined as the percentage change in earnings that occurs as a result of a
percentage change in earnings before interest and taxes.
CURRENCY BAND
The currency band is a system of exchange rates by which a floating currency
is backed by hard money. A country selects a range, or "band", of values at
which to set their currency, and returns to a fixed exchange rate if the value
of their currency shifts outside this band. This allows for some revaluation,
but tends to stabilize the currency's value within the band. In this sense, it
is a compromise between a fixed exchange rate and a floating exchange rate.
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