adminRecapitalisation: To inject fresh money into a firm, thus reducing the debts of a company. For example, when a government intervenes to recapitalise a bank, it might give cash in exchange for some form of guarantee, such as a stake in the company. Taxpayers can then benefit if the bank recovers.
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Recession: A period of negative economic growth. In most parts of the world a recession is technically defined as two consecutive quarters of negative economic growth – when real output falls. In the United States, a larger number of factors are taken into account, like job creation and manufacturing activity. However, this means that a US recession can usually only be defined when it is already over.
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Collateralised debt obligations (CDOs): A collateralised debt obligation is a financial structure that groups individual loans, bonds or assets in a portfolio, which can then be traded. In theory, CDOs attract a stronger credit rating than individual assets due to the risk being more diversified. But as the performance of some assets has fallen, the value of many CDOs have also been reduced.
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Commodities: Are products that, in their basic form, are all the same so it makes little difference from whom you buy them. That means that they have a market price. You would be unlikely to pay more for iron ore from a particular mine, for example.
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Credit crunch: The situation created when banks hugely reduced their lending to each other because they were uncertain about how much money they had. This in turn resulted in more expensive loans and mortgages for ordinary people.
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Credit default swap: A swap designed to transfer credit risk. The buyer of the swap makes periodic payments to the seller in return for protection in the event of a default. A bank which owns a lot of mortgage debt could swap it, but would have to make a pay-out if those mortgages were not repaid.
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Derivatives: Are a way of investing in a particular product or security without having to own it. The value can depend on anything from the price of coffee to interest rates or what the weather is like. Derivatives can be used as insurance to limit the risk of a particular investment. Credit derivatives are based on the risk of borrowers defaulting on their loans, such as mortgages.
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Hedge fund: A private investment fund with a large, unregulated pool of capital and very experienced investors. Hedge funds use a range of sophisticated strategies to maximise returns — including hedging, leveraging and derivatives trading.
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Hedging: Making an investment to reduce the risk of price fluctuations to the value of an asset. For example, if you owned a stock and then sold a futures contract agreeing to sell your stock on a particular date at a set price. A fall in price would not harm you — but nor would you benefit from any rise.
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Investment bank: Investment banks provide financial services for governments, companies or extremely rich individuals. They differ from commercial banks where you have your savings or your mortgage.
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Leveraging: Means using debt to supplement investment. The more you borrow on top of the funds (or equity) you already have, the more highly leveraged you are. Leveraging can maximise both gains and losses. Deleveraging means reducing the amount you are borrowing.
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