What is a Natural Hedge? A natural hedge refers to a strategy that reduces financial risks in the normal operation of an institution. It is typically done by investing in different assets and financial instruments with negative correlations among them. The conventional financial hedging strategy usually contains derivatives and forwards. The natural hedging strategy does…
What is the National Association of Real Estate Investment Trusts (NAREIT)? The National Association of Real Estate Investment Trusts – more commonly known as NAREIT – acts as the voice for equity and mortgage REITs, REITs traded on all major stock exchanges, as well as non-listed and private REITs. NAREIT’s primary focus is to act…
What is Virtual Currency? Virtual currency is a type of unregulated digital currency. It is not issued or controlled by a central bank. Examples of virtual currencies include Bitcoin, Litecoin, and XRP. Digital currencies are stored in and transacted through designated software, applications, and networks in digital form. Virtual currencies are typically issued by private…
What is the Economic Crash of 2020? The economic crash of 2020 was precipitated by the COVID-19 pandemic. The sudden appearance of the virus, its rapid spread, and uncertainty about how communicable and how lethal it might be sent financial markets and economies spiraling down worldwide. The Market Crash At the beginning of February, the…
What is Adverse Selection? Adverse selection refers to a scenario where either the buyer or the seller has information about an aspect of product quality that the other party does not have. Adverse selection is a common scenario in the insurance sector, where people in high-risk lifestyles or those engaged in dangerous jobs sign up…
What is Normal Distribution? The normal distribution is also referred to as Gaussian or Gauss distribution. The distribution is widely used in natural and social sciences. It is made relevant by the Central Limit Theorem, which states that the averages obtained from independent, identically distributed random variables tend to form normal distributions, regardless of the…
What are Point Estimators? Point estimators are functions that are used to find an approximate value of a population parameter from random samples of the population. They use the sample data of a population to calculate a point estimate or a statistic that serves as the best estimate of an unknown parameter of a population….
Prospect Theory, introduced by psychologists Daniel Kahneman and Amos Tversky in 1979, explores decision-making under risk and uncertainty. It is a psychology theory that suggests that individuals prioritize avoiding losses over seeking gains, exhibiting characteristics like certainty preference, discounting small probabilities, relative positioning, and loss aversion. The theory involves two phases: editing (framing effects) and…
What is Screening? Screening refers to a strategy that is used to combat adverse selection by filtering out false information and retaining only the true information. Screening is used in contemporary markets where the products being released into the market are getting increasingly complex for an ordinary consumer to comprehend. For example, in the auto…
What is Binomial Distribution? Binomial distribution is a common probability distribution that models the probability of obtaining one of two outcomes under a given number of parameters. It summarizes the number of trials when each trial has the same chance of attaining one specific outcome. The value of a binomial is obtained by multiplying the…
