Banking and International Finance.

Amit Sodha

BIF year 1

Tutorial essay: Banking and International Finance

Essay 2 (spring term)

In describing his trading experience throughout the book, Rothchild mentions financial terms that can be unfamiliar to the reader. He has, however, written a glossary defining these terms, which appear to be different from formal definitions in many ways and for various reasons.

Rothchild describes a technical analyst as ‘a person who thinks market action itself can predict future course of markets; deluded individual’. The formal definition is ‘Technical analysts try to forecast price movements by examining and charting the patterns formed by price history, trading volume, the ratio of advancing stocks to declining stocks, and other technical data’. Rothchilds definition is far less detailed as it doesn’t include the elements technical analysts consider in their analysis, maybe because he himself only had a brief understanding of their roles. Also, he is critical of technical analysts by calling them ‘deluded’, implying they are fools. This may be due to the number of times he ended up unsuccessful after following their information.

The formal definition of a fundamentalist is ‘An individual who bases investment decisions on information about a company, its sales performance, its management, its industry and the competitive environment, and the general economy rather than an examination of investment cycles’. Rothchild defined it as a ‘ person who thinks that earnings, conditions of companies, etc., will determine future stock prices; deluded individual’. Again, there is a contrast in the level detail where the formal version is more informative. The reason for this may be that the different authors may be targeting separate audiences, i.e. the website containing the formal definition may be targeting Economics students while Rothchild may be targeting apprentice i.e. the average reader. Also, there may not be the need for readers to know the meanings in such depth, which could be why has given a basic definition. Additionally, he implies that fundamentalists are dim-witted as they only ‘thinks that earnings…’ rather than being sure of what can happen. This creates the impression that Rothchilds definitions take an informal approach.

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Rothchilds definition of risk arbitrage is ‘investing in obvious takeover situations for maximum gain with minimum risk; taking a chance on the latest rumors’, which is written in straightforward language that can be understood by the average reader. This is contrasted with the formal definition which reads ‘Traditionally, the simultaneous purchase of in a company being acquired and the sale of stock of the acquirer. Modern risk arbitrage focuses on capturing the spreads between the of an announced and the eventual price at which the acquirer will the target's ’. Clearly, this version is more informative in that it gives more detail of the process and also it is written in more ponderous language not suitable for the average reader. The various audiences targeted by the two different authors again justify this. Additionally, the definitions can be dissimilar in terms of the way the words are spelt, i.e., Rothchild spells rumours as rumors. This can be due to the different native languages of the authors.

The definition of leverage has similarities such as they are both more or less the same length, easy to understand and written to the same degree of depth. However the main difference is that the formal definition uses examples to explain the meaning while Rothschild’s definition does not. This analysis is evident by reading the formal definition- ‘the use of various financial instruments or borrowed capital such as margin to increase the potential return of an investment’ and Rothchild’s version, ‘controlling a large investment with a smaller amount of money; betting more than you can afford to lose’.

There are three definitions of money supply, each consisting of different forms of money. They are distinguished by naming them M-1, M-2 and M-3. The definition to be analysed is M-1. Rothschild’s version is ‘ a popular measure of the amount in circulation; number invented by the Federal Reserve System to be ignored’. Again, we can analyse that this definition takes an informal approach because it contains Rothchild’s personal opinion, i.e., we should ignore the M-1 figure. Contrasting this version with the formal one, ‘the most basic measure, consists of currency, checking accounts, money market funds, NOW accounts and travelers checks. M1 is what the Fed watches most closely, and what it can most immediately influence by buying or selling Treasury securities’ we can see there are differences in terms of level of detail, depth and accuracy. This may be because the reader may not require the full explanation and also because Rothchild may have derived his own definition from his experience in stock trading.

The sixth definition to be discussed is ‘forecaster’. Rothchild defines this as, ‘expert who predicts the direction of the economy, interest rates, etc., that will affect the market; paid guesser’. It is again evident that Rothchild takes an informal approach in describing the term. This is shown by him neglecting the complexity of the job, i.e., her calls them a ‘guesser’ and also he incorporates one of his own opinions into the definition. The formal definition is, ‘One who makes projections about future economic performance on the basis of historical and current conditions data’. This version gives a better idea of the forecasters job in that it tells us what factors they consider and also it is formal. The dissimilarities may be because of the differences in the level of knowledge in authors about forecasting.

Inflation is a matter which is important because it involves the falling value of money. Inflation can be defined as ‘the general rise in the price levels’ in a given time period. It is measured by the changing index. However, ‘rising inflation’ is when the rate at which prices rise increases per time period. This means the effects of inflation worsen each time period. Rothchild’s version is, ‘period when things are worth more than money, and you have more of the latter’. This version, although puts the same point across, does not sound “professional enough” as it makes use of words like ‘things’ and ‘you’. This may be done to make it more comprehensible to the average reader.

After comparing and contrasting the two different versions of the definitions, we can point out that the most apparent differences were the different degrees of detail and depth; the complexity of languages used; the extent of formality in the language and the different grammar use. The main reasons for the dissimilarities were, the different audiences targeted by the authors; the different levels of knowledge of the authors and the different levels of explanation required by the readers. However, as the formal definitions were obtained from various sources, the comparisons were completely fair