Encyclopedic Dictionary of International Finance and Banking Phần 2 pot

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ARBITRAGEUR

An arbitrageur is an individual or business that exercises arbitrage seeking to earn risk-free

profits by taking advantage of simultaneous price differences in different markets.

ARITHEMETIC AVERAGE RETURN VS. COMPOUND (GEOMETRIC)

AVERAGE RETURN

It is one thing to calculate the return for a single holding period but another to explain a

series of returns over time. If you keep an investment for more than one period, you need to

understand how to derive the average of the successive rates of return. Two approaches to

multiperiod average (mean) returns are the arithmetic average return and the compound

(geometric) average return. The arithmetic average return is the simple mean of successive

one-period rates of return, defined as:

where n = the number of time periods and r = the single holding period return in time t.

Caution: The arithmetic average return can be misleading in multiperiod return computations.

A better accurate measure of the actual return obtained from an investment over multiple

periods is the compound (geometric) average return. The compound return over n periods is

derived as follows:

EXAMPLE 16

Assume the price of a stock doubles in one period and depreciates back to the original price.

Dividend income (current income) is nonexistent.

The arithmetic average return is the average of 100% and −50%, or 25%, as indicated below:

However, the stock bought for $40 and sold for the same price two periods later did not earn

25%; it earned zero. This can be illustrated by determining the compound average return. Note

that n = 2, r1 = 100% = 1, and r2 = −50% = −0.5.

Then,

Time periods

t = 0 t = 1 t = 2

Price (end

of period)

$40 $80 $40

HPR — 100% −50%

Arithmetic average return 1/n r = ∑ t

Compound average return = 1 r + 1 ( ) 1 r + 2 ( )… 1 r + n ( ) ≠ n – 1

100% 50% + ( ) –

2

--------------------------------------- 25% =

Compound return 1 1+ = ( )( ) 1 0.5 – – 1

2 = ( )( ) 0.5 – 1

11 = == – 1 1 – 0

ARBITRAGEUR

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EXAMPLE 17

Applying the formula to the data below indicates a compound average of 11.63 percent, somewhat

less than the arithmetic average of 26.1 percent.

The arithmetic average return is

(−0.300 + 1.167 − 0.083)/3 = .261 = 26.1%

but the compound return is

See also TOTAL RETURN; RETURN RELATIVE.

ARM’S-LENGTH PRICING

Arm’s-length pricing involves charging prices to which an unrelated buyer and seller would

willingly agree. In effect, an arm’s-length price is a free market price. Although a transaction

between two subsidiaries of an MNC would not be an arm’s-length transaction, the U.S.

Internal Revenue Code requires arm’s-length pricing for internal goods transfers between

subsidiaries of MNCs.

See also INTERNATIONAL TRANSFER PRICING.

ARM’S-LENGTH TRANSACTION

An arm’s-length transaction is a transaction between two or more unrelated parties. A trans￾action between two subsidiaries of an MNC would not be an arm’s-length transaction.

See also ARM’S-LENGTH PRICING.

ASIAN CURRENCY UNIT

Asian Currency Unit (ACU) is a division of a Singaporean bank that deals in foreign currency

deposits and loans.

ASIAN DEVELOPMENT BANK

Created in the late 1960s, the Asian Development Bank is a financial institution for supporting

economic development in Asia. It operates on similar lines as the World Bank. Member

countries range from Iran to the United States of America.

See also INTERNATIONAL MONETARY FUND; WORLD BANK.

(1) (2) (3) (4) (5)

Time Price Dividend Total return Holding period return (HPR)

0 $100 $−

1 60 10 −30(a) −0.300(b)

2 120 10 70 1.167

3 100 10 −10 −0.083

(a) $10 + ($60 − $100) = $−30

(b) HPR = $ −30/$100 = −0.300

[ ] ( ) 1 0.300 – ( ) 1 1.167+ + ( ) 1 0.083+ 3 – 1 = 0.1163 or 11.63%. ,

ASIAN DEVELOPMENT BANK

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ASIAN DOLLAR MARKET

Asian dollar market is the market in Asia in which banks collect deposits and make loans

denominated in U.S. dollars.

ASIAN DOLLARS

Similar to Eurodollars, Asian dollars are U.S. dollar-denominated deposits kept in Asian￾based banks.

ASKED PRICE

See ASKED RATE.

ASKED RATE

Also called ask rate, selling rate, or offer rate. The price at which a dealer is willing to sell

foreign exchange, securities, or commodities.

See also BID RATE.

ASSET MANAGEMENT OF BANKS

A commercial bank earns profits for stockholders by having a positive spread in lending and

through leverage. A positive spread results when the average yield on earning assets exceeds

the average cost of deposit liabilities. A high-risk asset portfolio can increase profits, because

the greater the risk position of the borrower, the larger the risk premium charged. On the

other hand, a high-risk portfolio can reduce profits because of the increased chance that parts

of it could become “nonperforming” assets. Favorable use of leverage (the bank’s capital￾asset ratio is falling) can increase the return on owners’ equity. A mix of a high-risk portfolio

and high leverage could result, however, in insolvency and bank failure. It is extremely

important for banks to find an optimal mix.

A bank is also threatened with insolvency if it has to liquidate its asset portfolio at a loss

to meet large withdrawals (a “run on the bank”). This can happen, because, historically, a

large proportion of banks’ liabilities come from demand deposits and, therefore, are easily

withdrawn. For this reason, commercial bank asset management theory focuses on the need

for liquidity. There are three theories:

1. The commercial loan theory. This theory contends that commercial banks should

make only short-term self-liquidating loans (e.g., short-term seasonal inventory

loans). In this way, loans would be repaid and cash would be readily available to

meet deposit outflows. This theory has lost much of its credibility as a certain

source of liquidity, because there is no guarantee that even seasonal working capital

loans can be repaid.

2. The shiftability theory. This is an extension of the commercial loan theory stating

that, by holding money-market instruments, a bank can sell such assets without

capital loss in the event of a deposit outflow.

3. The anticipated-income theory. This theory holds that intermediate-term install￾ment loans are liquid because they generate continuous cash inflows. The focus is

not on short-term asset financing but on cash flow lending.

It is important to note that contemporary asset management hinges primarily on the shiftability

theory, the anticipated-income theory, and liability management.

See also LIABILITY MANAGEMENT OF BANKS.

ASIAN DOLLAR MARKET

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