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High Finance

Complex financial transactions that involve a huge amount of money

What is High Finance?

High finance refers to complex financial transactions that involve a huge amount of money. It is often associated with unethical practices when lending, borrowing, or investing large amounts of money.

 

High Finance

 

A large proportion of senior professionals working in the financial sector – including bankers, managers, and funders – engage in unethical practices when performing high financial transactions involving the creation, liquidation, or ownership of financial assets.

The phenomenon is attributed to competitiveness, disproportionate power representation, and interpersonal prominence. Usually, players use mathematical and highly speculative algorithms to manipulate transactions to generate more profits.

 

Summary

  • High finance is a transaction involving a large amount of money. 
  • Financiers in the financial sector use complex algorithms to financialize every practice to generate additional profits.
  • The concept of high finance is strongly rooted in the financial sector due to the growth of electronic transactions.

 

Understanding High Finance

A finance practitioner’s mastery of financialization presents a danger in the financial sector. The practice is often performed through the manipulation of algorithms rather than through traditional banking practices. Since most high finance players use sophisticated instruments to reward themselves, they do not incur losses even when their clients do.

Take, for example, the current amount of student debt in the U.S., now estimated at more one trillion US dollars. The main borrowers of student loans come from modest social-economic households. Financial institutions only benefit from the interest they charge on the loan.

However, high finance can derive more benefits out of accumulated student debt at a high human cost. High finance can draw more benefits from the debt beyond the chargeable interest rate, given its instruments that allow it to perform this to the disadvantage of the borrower.

Another example to illustrate high finance practice is when delivery companies create a delay in the delivery of products to create scarcity and benefit by raising prices. Such a case shows another dimension of high finance that is different from production and consumption.

In such a scenario, profits are made by speculating all types of items, such as money market and other investment products. An average investor may not understand the complex methods used by high finance to generate profits since they lack access to complex mathematical algorithms.

 

How High Finance Balances Risks and Facilitates Growth

Despite the demerits associated with high finance, it yields additional benefits to the executors through the generation of more revenues. Nevertheless, additional revenues are achieved through methods that impact other parties negatively. Examples of entities that sustain formidable damages from high finance include traditional financial institutions, households, and municipal governments and companies.

For example, pension funds are usually funded plans that are well-managed for the retirees’ benefit. However, dubious financiers can utilize such funds to build additional wealth for themselves at the expense of the actual beneficiaries. Such cases are common in workers’ pension funds, with some institutions putting systems in place to monitor and tracking the number of funds lost through high finance practices to institutions that handle such sums of money.

In addition to corruption, the financial manipulation of funds is designed to yield excessive benefits to managers. The difficulty for the average worker to understand the processes involved, alongside high finance complexity, makes the practice more tenable.

 

Significance of High Finance

The concept of high finance is strongly rooted in the financial sector due to the growth of electronic transactions, resulting in major impacts, as discussed below.

The first impact is the building of lucrative financial hubs and advanced computer operations that continuously perform complex mathematical algorithms.

Another impact is seen in the upgrading of the financial institution’s infrastructure to enhance transaction speed and increase the efficiency of operations. For example, installing fiber optic cables can boost the efficiency of transactions and enable paperless transactions without the need to visit the traditional banking halls.

High finance uses complex algorithms to turn various items – such as buildings and other products – into asset-backed securities. Even an empty city building may be converted to an asset-backed security to deliver profits.

For example, some companies extracted profits to cushion the financial shock that hit the sector during the mortgage crisis. Many U.S-based financial institutions realized significant gains from such asset-backed securities. The Federal Reserve also initiated quantitative easing measures to make he companies survive bankruptcy. The crisis also affected a few cities around the world.

For example, in 2018, a group of cities in Italy went bankrupt at the same time. It later emerged that investors in the cities hedged their risks on specific derivative commodities. Cities are strategically mobilized and used to create counter-powers to tackle financial powers.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Algorithmic Trading
  • Bank Reserves
  • Machine Learning (in Finance)
  • 2008 Global Financial Crisis

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