What is Financial Exposure? Financial exposure is a term used to describe investment risk. It is a calculation of the amount of money that an investor might potentially lose from an investment. An investor’s financial exposure may be expressed as an absolute monetary amount – e.g., $10,000 – or as a percentage of the amount…
What is Financial Engineering? Financial engineering encompasses a broad, multidisciplinary field of study and practice that essentially applies an engineering approach and methodology to the world of finance. It integrates and utilizes information obtained from different fields, such as economics, mathematics, computer science, and financial theory. Much of financial engineering consists of converting financial theories…
What is Financial Distress? Financial distress is a term commonly used in corporate finance that describes any situation where an individual’s or company’s financial condition leaves them struggling to pay their bills, especially loan payments due to creditors. Severe, prolonged financial distress may eventually lead to bankruptcy. When a condition of financial distress occurs, it…
What is a Financial Crisis? A financial crisis is defined as any situation where one or more significant financial assets – such as stocks, real estate, or oil – suddenly (and usually unexpectedly) loses a substantial amount of their nominal value. Common examples of a financial crisis include financial market crashes – either widespread or…
What is a Solvency Ratio? A solvency ratio is a performance metric that helps us examine a company’s financial health. In particular, it enables us to determine whether the company can meet its financial obligations in the long term. The metric is very useful to lenders, potential investors, suppliers, and any other entity that would…
What is the Sortino Ratio? The Sortino ratio is a risk-adjustment metric used to determine the additional return for each unit of downside risk. It is computed by first finding the difference between an investment’s average return rate and the risk-free rate. The result is then divided by the standard deviation of negative returns. Ideally,…
What is Socially Responsible Investment (SRI)? Socially responsible investment, or SRI, is a strategy that considers not only the financial returns from an investment but also its impact on environmental, ethical or social change. Identifying which ventures to put their hard-earned money into can be difficult for potential investors. It is why such investors consider…
What is a Social Welfare System? A social welfare system is a network of programs created to assist a country’s citizens at various stages of their lives. The system usually arises from the efforts of a government or organizations to provide social welfare. It’s an ongoing process meant to care for the specific needs of…
What is Financial Inclusion? Financial inclusion refers to the provision of equally available and affordable access to financial services for everyone, regardless of their level of income. It applies to providing services to both individuals and businesses. Understanding Financial Inclusion Financial inclusion is not only important for people in undeveloped countries. It’s estimated that as…
What is the Fisher Effect? The Fisher Effect refers to the relationship between nominal interest rates, real interest rates, and inflation expectations. The relationship was first described by American economist Irving Fisher in 1930. The relationship is described by the following equation: (1+i) = (1+r) * (1+π) Where: i = Nominal Interest Rate r =…
