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You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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C
Corporates
Shorthand for corporate bonds, a debt issued by companies, rather than governments. Sovereigns that borrow in their own currencies can never default as corporates can, so the yield on corporate bonds is higher than the yield on government bonds of similar maturity. That extra yield is the credit spread, and it is the real-time market pricing of default risk for that issuer.”
There are two big camps in the corporate bond market. Investment-grade corporates are issued by companies with good credit ratings (BBB or higher on the S&P scale) and have relatively small spreads. High-yield corporates, or junk bonds, are issued by lower-rated or unrated companies and have materially wider spreads to compensate for their elevated default risk.
The prices of corporate bonds are driven by credit spreads (credit risk) and underlying government yields (interest rate risk). In a risk-off environment, spreads widen even as prices fall and government yields are flat.
Example: A large consumer goods company with an investment-grade rating issues 10-year bonds that yield 5.2%, while government bonds of the same maturity yield 4.5%. The 70-basis-point spread reflects the market’s assessment of the firm’s credit risk. If the company’s business deteriorates, then the spread widens. The price of the bond falls, even though government yields haven’t moved at all.
Correlation
A statistical measure of how closely two assets or securities move in relation to one another.
Correlation Coefficient
A statistic that quantifies the extent to which two variables are correlated, ranging in value from -1 to +1. If the coefficient is positive, it is the case of perfect positive correlation (+1): both variables change in the same direction. A coefficient of -1 indicates that the two variables are perfectly negatively correlated, that is, one increases while the other decreases. If zero, no linear relation.
Correlation plays a crucial role in finance, particularly in the context of portfolio construction, hedging, and risk modelling. A high positive correlation between two assets does little to diversify if both assets move together; then having both is not much of a hedge against losses. Low or negative correlation assets reduce the volatility of one another to some degree.
The biggest drawback is that of instability. What worked in normal times may not work in a crisis, as previously uncorrelated assets tend to move in tandem during times of market stress when diversification is most desired.
Example: A portfolio manager wants to determine the correlation coefficient for equities and long-duration bonds and reports a value of -0.45. Bonds generally rally in equity stress periods, which helps to offset losses. The manager takes this as an excuse for selling the bond allocation, but admits that this relationship may come undone in a “stagflationary” scenario where both asset classes are sold at the same time.
Cost of Carry
The overall expense of maintaining a financial position or physical asset over time, including expenses of financing, storage, insurance, and less income generated. Cost of carry is the major factor in determining whether a market is in backwardation or contango in futures pricing.
Carry for financial assets is considered as the financing rate minus the income received. A positive carry is when income is higher than costs, and return is generated from the position while it is held. If the position has a negative carry, the position will bleed till the thesis’s expiration.
When goods are traded in physical form, costs of financing also include storage and insurance, so carry is nearly always a cost. The classic negative-carry asset is gold, which has no yield and real storage costs. Traders determine if a position will “carry itself” while waiting for price action.
What matters in positioning in non-yielding assets is the cost of the financing, which is higher for negative carry positions.
Example: A trader has a long position in gold, with a financing rate of 5% per annum. Gold pays no yield. Cost of carry is therefore 5% per year for the position to make money; the price of the metal needs to increase by over 5% annually, and the financing bleed reduces the metal’s profitability every month the price does not rise.
Costa Rican Colon (CRC)
The official currency of Costa Rica issued by the Banco Central de Costa Rica. It is named after Christopher Columbus, Christopher in Spanish is “Colón. Divided into 100 céntimos, although in practice the ceñtimo past its use date due to inflation.
Costa Rica has a managed float. The US dollar is also in use, especially in tourism, real estate, and large-scale trade, and has become an informal part of the structure of the economy in the form of the colón. Many hoteliers, tour operators, and property contractors will price in dollars, as well as in colons.
The economy is moderately diversified, with substantial manufacturing of medical devices and technology services, and ecotourism, which provides the CRC with somewhat greater fundamental support than the currencies based on agricultural exports alone that are found in Central America.
Example: A tourist resort charges prices in US dollars, gives payments to local employees in colons at the market rate, and settles the invoices of local suppliers in colons. The mixed-currency model is ubiquitous in Costa Rican tourism, with the informal economy dollarisation also being a big feature in the economy alongside the official legal tender.
Council of the European Union
The EU body of the governments of the member states, also called the Council of Ministers. Not to be mistaken with the European Council (heads of state) or the Council of Europe (an independent organisation, not part of the EU). Council meetings are held in various committees according to the subject: finance ministers in ECOFIN, foreign ministers in the Foreign Affairs Council.
This is because the Council has legislative powers as well as the European Parliament. The majority of EU laws need to be ratified by both before they come into force. In taxation and foreign policy, unanimity will reign each member state will have an effective veto. In most other regions, qualified majority voting would call for a certain percentage of member countries and citizens to approve measures.
ECOFIN’s decisions related to financial markets are relevant for the markets, such as the banking sector, as well as those concerning fiscal rules and economic coordination.
Example: In the ECOFIN forum, finance ministers agree to revised fiscal rules for deficit limits in the eurozone. Bond yields in deficit countries squeeze closer as markets come to terms with additional constraints. The euro strengthens slightly on hopes that better fiscal discipline will ease the long-term sovereign risk of the euro zone.
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