onomi on epts and erminolo ies 22.45
difference in price as profits. It is also known as
sequestrAtion bear operation. Short-sellers, however, could get
The process under which a third party (the caught on the wrong foot if the market reverses
sequestrator) holds a part of the disputed assets till the downtrend.
the dispute is settled.
shADow bAnking That lower level of the prices for the product of a
When financial intitutions create credit (forward firm at which the firm decides to close (shut) down
loan) like a bank but are not under the banking – as it has become impossible to recover even the
regualtory framework of the country, they are short-run variable cost at the price. Many such
supposed to be involved in shadow banking. instances we get in the Euro-American economies
Hedge funds are one such example. It also includes during the period of the Great Depression (1929).
unregulated activities of regulated entities.
Credit default swaps (CDS) are the examples of skimming price
it—regulated entities (like banks) provide loan
A pricing method of charging high profits—
protection in it to other lenders against default
adopted by a firm when consumers are not price-
risks by the borrowers.
sensitive and demand is price-inelastic.
As such institutions do not accept traditional
bank deposits they easily escape the regulatory
design of a country. Such acts are financially risky
to the economy, as in it ‘capital requirements’ (of Smurfing (also called structuring) is a method
CRR, SLR, etc.) are bypassed by the institutions. in which small sizes of money is kept in several
This is why in cases of default there remains no number of bank accounts to hide the real identity
standby capital/asset to counter it. After the ‘sub- of the real owner. This has been a very commonly
prime’ crisis in USA (2007-08), shadow banking used method of money-laundering. During
came under increasing scrutiny and regulation the reform period, as more prudential norms of
across the world. banking regulation evolved, such acts declined
in India. ‘Smurfer’ (or ‘money mule’) is a person
shArpe rAtio who does this.
The idea of William Forsyth Sharpe (Nobel
Economist) which checks whether the rewards
from an investment justify the risk. For this The costs borne by the society at large resulting
Sharpe uses past data of rewards and calculates from the economic activities by the firms–
it using standard deviation. This is why the ratio pollution being a prominent example.
says nothing about the future performance of the
investment. solvency mArgin
The term made news in the 1970s concerning a
life insurance company. The only requirement,
Selling shares without possessing them. After till then, by a life insurance company was that the
the prices fell to a certain extent the short-seller value of its assets should not be less than the value
covers his position by cheaper shares booking the of its liabilities. The regulators in many countries