Sunday, November 30, 2008
2:25 AM
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Book - Rich Dad Poor Dad

This is one of the 1st book on finance I read...
Though some people find this book not that good. I have read this book and found it much more interesting... This is a very good book for people who are on employee side and really want to change there thinking about money and the way it grows....
Everyone needs money... "Some people play for not to LOSE and SOME PEOPLE PLAY TO WIN"...
Idea is very simple, your money management depends on the way you think about money....

For all those who are really interested to KICK start their thinking about the changing economy and about the money, and our emotions about money and security should go for this book...
And then the second book by same author "Cash Flow Quadrants..."

Keep reading...




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Friday, November 28, 2008
5:34 AM
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CRR

This article is about CRR ratio... understanding of CRR... I got this article from this link... (click on this)

What is CRR?

Indian banks are required to hold a certain proportion of their deposits as cash. In reality they don’t hold these as cash with themselves, but with Reserve Bank of India (RBI), which is as good as holding cash. This ratio (what part of the total deposits is to be held as cash) is stipulated by the RBI and is known as the CRR, the cash reserve ratio. When a bank’s deposits increase by Rs100, and if the cash reserve ratio is 10, banks will hold Rs10 with the RBI and lend Rs 90. The higher this ratio, the lower is the amount that banks can lend out. This makes the CRR an instrument in the hands of a central bank through which it can control the amount by which banks lend. The RBI’s medium term policy is to take the CRR rate down to 3 per cent.

What does a hike in this rate mean?

The hike in CRR from 4.5 to 5 per cent will increase the amount that banks have to hold with RBI. It will therefore reduce the amount that they can lend out. The move is expected to shift Rs 8,000 crore of lendable resources to RBI. In the past few months the money that banks have available for giving out as credit is greater than the amount they have been lending out. This has led to “an overhang of liquidity” in the system. The objective of the CRR hike is to “mop up” some of the “excess liquidity” in the system.

Will this mean a rise in interest rates on my deposits and home loans too? By when and by how much?

The hike in CRR is not likely to lead to an immediate increase in interest rates. There is excess liquidity in the system even after a higher amount is deposited with RBI as reserves.

Unless the demand for credit picks up to the extent that the money is all lent out, banks will not have an incentive to raise interest rates.

The inflation rate may continue to be high, the economy may also continue to witness growth which will keep the demand for credit high, and international trends are for rates to move up. This means that sooner or later interest rates will go up. The first rates to get impacted are yields on government bonds. We have already seen this happening. If the inflation rate keeps rising, RBI may raise the ‘repo rate’, the short term rate at which banks park excess funds with the RBI. This makes it less attractive for banks to lend.

Further, RBI may raise the bank rate, the rate at which it lends to banks.

At this point you may expect interest rates on home loans and fixed deposits to go up as well. Over a year rates could go up by as much as 3 per cent.




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Wednesday, November 26, 2008
2:28 AM
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Inflation Derivatives Project Report

This is Just an attempt to understand inflation derivatives, it is a very vast topic to understand but I am putting my efforts to understand derivatives... :)
My project report is as below



Inflation Derivatives - Free Legal Forms



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Saturday, November 15, 2008
10:57 PM
1 comments

The Costs of Inflation

From the MicroEconomics Essentials
The Costs of Inflation

Economists do not pay much heed to the usual complaints about inflation. For most people the impact of rising prices is offset by rising wages. Those living on fixed incomes, such as welfare recipients or old-age pensioners, can (although may not) be protected through appropriate policy action. Arbitrary redistribution of wealth, such as rises in real estate values, comes about mainly if an inflation is unanticipated, in which case economists would condemn it.

From their study of microeconomics economists know that our economic system works well because prices act as signals to induce producers to produce the things we value most at the lowest cost—the right prices ensure that the economy maximizes the total welfare of its participants. This is what is meant when it is said that the price system is a very efficient way of allocating and distributing goods and services. To economists, the main cost of inflation is the resource misallocation it causes—the loss of efficiency that results because inflation distorts price signals. This happens in many different ways, some examples of which follow.

-During periods of inflation people are more interested in investing their savings in assets designed to protect them against inflation, such as real estate, rather than in productive investments that enhance the growth and efficiency of the economy. A classic example is people in Brazil holding wealth in the form of Volkswagens during high-inflation periods.

- During high inflation business finds it worthwhile to collect bills more promptly, using resources for this purpose that could otherwise have been used to produce goods or provide other services.

- Low inflations are steady and predictable; high inflations are volatile and unpredictable. This volatility creates uncertainty in the business community, reducing investment activity. Reduced investment in turn reduces economic growth. Some estimates suggest that reducing inflation from 10 percent to 5 percent will increase productivity by about 0.2 percent per year.

- Individuals reduce money holdings to cut wealth losses caused by rising prices lowering the purchasing power of their cash and checking accounts. Getting along with fewer money holdings is inconvenient, misallocating the individual's personal resources of time, energy, and leisure. The cost of this inconvenience is estimated to be equivalent to about 0.05 percent of GDP per extra percentage point of inflation above normal.

- In the extreme case of hyperinflation, inflation of over 100 percent per year, the currency system breaks down, and the economy reverts to the far less efficient barter system. During the spectacular German hyperinflation of 1923 prices at times rose by over 200 percent per week, severely affecting economic activity—people would work only if paid immediately, and spent every spare moment buying things to get rid of cash.

Offsetting these arguments, however, is the fact that many prices are inflexible or "sticky" in the downward direction. Many prices that should fall tend not to do so, instead just remaining constant. This implies that for the price system to operate efficiently, relative prices must change through selected price increases, rather than by having some prices rise and others fall. In reality the efficiencies of the price system can be gained only by allowing some inflation.

Most laypersons are amazed to discover that economists' measure of the harm done by inflation reflects phenomena of such seemingly little severity. It seems there are few substantive costs to modest inflation, and some benefits. Why, then, are we so paranoid about inflation?

For reasons explained at length later in this book, inflation is very quick to rise but very slow to fall. Although a low, steady rate of inflation does not carry significant cost, to bring inflation down to this level a high cost must be paid in the form of a prolonged period of high unemployment. We fear inflation because if it rises above the modest level we are willing to live with, we will have to pay a high unemployment cost to bring it back down.



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Thursday, November 13, 2008
7:05 AM
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The `Dollar` factor in Gold & Oil prices (Article from Myiris)

This article is from Myiris Feed... I found it interesting so I am putting it.
Click Here to check original article.
In a broader sense, oil prices are influenced by socio economic as well as geo political factors. When political tensions arise in oil regions, oil prices seem to climb upward. It has been noted that there is a strong relation between Oil, gold and dollar, however it is the market trend that decides whether the relation is direct or inverse.

Let`s glance through a few indicators -
Gold, crude oil and dollar are interconnected and interdependent for the valuation
since there was age-old practice of oil producing countries to hold gold in exchange
for oil.

Oil, gold and commodities have all been priced in US dollars since 1975 when
OPEC officially agreed to sell its oil exclusively for US dollars. Since then the global
oil trade was priced in dollar. Hence any appreciation or depreciation of dollar impac
oil prices.

Crude prices directly affect the oil import bill of any country resulting into trade
deficit. This trade deficit would pressurize the value of local currency eventually
hitting money circulation in the economy thereby leading to the inflation. Inflationary
conditions in crude oil markets, which stoke uncertainty, inevitably spark a rally in
global gold prices.

Gold plays an anticipatory role. Gold which acts as the hedging option against the
inflationary situation for investor, attract investments, thereby leading to appreciation
in value. If crude price rises, Gold also moves up.

All over the world, the international trade is denominated in US currency. Hence any
negative news about the US economy, such as slowdown in consumption, rise in
inflation, or a cut in interest rates by the Federal Reserve, weakens the dollar. As
the dollar`s exchange value falls, it takes more dollars to buy gold so the dollar falls,
while gold prices rise and vice versa.

Similarly, most of the countries hold foreign reserves in the form of US dollars. If the
dollar loses value, the entire basket which is denominated in US dollar, loses value.
So, countries look for safe haven i.e. Gold. If dollar loses value, Gold moves up, and
vice versa.

Foreign gold market paves the path for the Indian gold market as almost the entire
gold requirement is met thought imports. Besides, volatile financial markets, appear
to be good for gold as an investment.

To conclude, one would find an inverse relation between dollar and gold; however the gold and oil prices are directly related to each other. In recent days, the gold, crude oil are considered to be crucial commodities whose prices are directed by geopolitical tensions and economic uncertainties. In the light of the above facts, it may be inferred that it is the US currency that rules the gold and oil markets

Wednesday, November 12, 2008
10:46 AM
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Breakeven inflation

Breakeven inflation

Breakeven inflation is the difference between nominal yield on fixed rate investment and the real yield on an inflation linked investment of similar maturity and credit equality. If average inflation is more than the break even, the inflation linked investments outperform the fixed rate and if inflation averages below the break even the fixed rate investments outperforms.

Break-even inflation = comparable fixed rate – inflation linked real yield

In theory calculating Break-even inflation from simply subtracting real yield from a nominal yield is crude from of properly compounded calculation.

Breakeven for a market with an annual yield
(1 + bei) = (1 + n) / (1 + r) where bei is break-even inflation

For semi-annual market

(1 + bei) = [( 1 + n/2 ) ^2] / [( 1 + r/2)^2]

Where ‘n’ is a yield on nominal bond
And ‘r’ is a yield on inflation-linked bond

Tuesday, November 11, 2008
11:28 PM
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Index Seasonality

Seasonality


Inflation is subject to recurring pattern over the course of year and so the CPI. Consumer behavior exhibit seasonal features; in many industrialized countries consumer spending goes up to Christmas, which often followed by price discounting in January; then demand for energy and warm cloths is higher in the cold winter months than in the summer and so on. To the extent that such behavior causes prices to fluctuate this should in turn be reflected by seasonal movements in the consumer price indices. Government behavior can also influence these cycles

Existence of Seasonality complicates the analysis of inflation-linked bond prices. There are significant advantage in a well-established index being employed, but such indices often exhibits seasonal pattern. Potential solution for this is to use a seasonally adjusted price index, but in general such series is less understood. Choice of a seasonal price index leads to two issues; expected nominal size of future cash flows will be impacted by their timing with respect to the seasonal pattern, and yields quoted using standard market convention will also be impacted.


12:45 AM
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Inflation Linked Bonds

Inflation Linked Bonds (ILB) – An Inflation linked Bond (ILB) is a bond which provides protection against inflation, since principal amount of such bonds is indexed to inflation. The coupon payment for ILB is lesser than the fixed rate bonds with a comparable maturity. But in case of ILB, as the principle amount grows, the payment increases with inflation.
All ILBs are linked to Inflation, however the precise provision vary around the world. Most often, the outstanding principle is adjusted in response to changes in the Consumer Price Index (on daily basis). In general, the principal and interest payments on an inflation-linked bond rise with any substantial increases in the consumer prices so that the bonds cash flow increases in line with a rise in inflation.

Monday, November 10, 2008
9:58 AM
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Causes of Inflation

CAUSES OF INFLATION

Inflation may be caused by an increase in the quantity of money in circulation. This has been seen most graphically when governments have financed spending in a crisis by printing money excessively, often leading to hyperinflation where prices rise at extremely high rates. Another cause can be a rapid decline in the demand for money as happened in Europe during the black plague.

The money supply is also thought to play a role in determining levels of more moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economics by contrast typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation.

A fundamental concept in such Keynesian analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggested that price stability was a trade off against employment. Therefore some level of inflation could be considered desirable in order to minimize unemployment. The Philips curve model described the US experience well in the 1960s, but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s.

Another Keynesian concept is the natural gross domestic product, a level of GDP where the economy is at its optimal level of production. If GDP exceeds its natural level, inflation will accelerate as suppliers increase their prices. If GDP falls below its natural level, inflation will decelerate as suppliers attempt to fill excess capacity.


9:53 AM
1 comments

Inflation

What is Inflation – Inflation is a situation in economy where, there is more money chasing less of goods and services. In other words it means there is more supply or availability of money in the economy and there are less goods and services to buy with that increased money. Thus goods and services command higher price than actual as more people are willing to pay a higher value to buy the same goods. In this inflationary situation, there is no real growth in the output of the economy per sector. It’s simply more money chasing few goods and services.

THE BASIC TYPES OF INFLATION

Demand-Pull Inflation
Demand-pull inflation places responsibility for inflation squarely on the shoulders of increases in aggregate demand. This type of inflation results when the four macroeconomic sectors (household, business, government, and foreign) collectively try to purchase more output that the economy is capable of producing.
  • In terms of the simple production possibilities analysis, demand-pull inflation results when the economy bumps against, and tries to go beyond, the production possibilities frontier. Then end result is inflation.
  • In more elaborate aggregate market analysis, demand-pull inflation results when aggregate demand increases beyond aggregate supply creating economy-wide shortages. As with market shortages, the price (or price level) rises. Then end result is inflation.

Cost-Push Inflation
Cost-push inflation places responsibility for inflation directly on the shoulders of decreases in aggregate supply that result from increase in production cost. This type of inflation occurs when the cost of using any of the four factors of production (labor, capital, land, or entrepreneurship) increases.
  • In terms of the production possibilities analysis, this means that the production possibilities frontier is shrinking closer to the origin, causing it to bump down against the aggregate demand. Then end result is inflation.
  • In the aggregate market analysis, aggregate supply decreases to less than aggregate demand creating economy-wide shortages. As with any market shortages, the price (price level) rises. Then end result is inflation.
The Inflation Rate and the Price Level
The inflation rate is the percentage change in the price level.

The formula for the annual inflation is

Inflation Rate = (Current year's price index - Last year's price index) / Last year's price index

WHAT ARE THE WAYS OF MEASURİNG INFLATION?

Consumer Price Index (CPI) - This measures the consumer prices of a basket of commodities in different cities.

Wholesale Price Index (WPI) - This measures the different prices of a basket of commodities in the wholesale markets. The basket is broadly made up of Primary products, Fuel products, and manufactured products.

GDP Deflector - This is used to adjust measure of gross domestic product for inflation.