Nominal annual rate and Speculation: Difference between pages

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The rate of return - or cost of borrowing - ''per [[conventional year]]'' named or quoted in a market, under the quoting convention for the given market.
1. ''Risk.''
Any risk taking activity or decision which depends for its favourable result on market rates or prices.


Market quotations are usually given per annum, and for this reason the term ''nominal rate'' is sometimes used interchangeably with nominal annual rate.
For example, a decision to leave a natural operational exposure unhedged, or a decision not to buy a relevant insurance contract.




===<span style="color:#4B0082">'''Example 1: Overnight interest'''</span>===
2. ''Market manipulation.''


GBP overnight interest payable at the periodic rate of 0.014% per day, would conventionally be quoted on a nominal annual basis as:
Intentionally creating market positions - for example by buying or selling assets or derivative contracts - in the hope of making profits from favourable changes in market rates or prices.


= number of times the period fits into a conventional year x periodic rate
For example, buying an asset in the hope that its market price will rise in the short term.


= 365 x 0.014%


= 5.11%.
3. ''Market pricing.''


Similar position-taking activity which depends for its favourable result on there being no material change in prevailing market rates, prices or conditions.


===Other names for Nominal annual rates===
For example, selling straddle options (being one of the speculative activities undertaken by the Barings Bank ‘rogue trader’ Nick Leeson).
The nominal annual rate is sometimes also known as a 'quoted rate', 'market rate, or 'nominal rate'.


The nominal annual rate should not be confused with the effective annual rate, which is usually different.
Another example would be a decision to operate without committed credit lines, or a decision to ride the yield curve.
 
 
===Notation===
 
Nominal annual interest rates and yields are often denoted by 'R'.
 
This distinguishes them from periodic interest rates and yields (r), and from effective annual rates (EAR).
 
 
===Conversion===
 
Using the notation above:
 
R = nominal annual interest rate or yield
 
r = periodic interest rate or yield
 
n = number of times the period fits into a conventional year
 
 
====To convert from a periodic rate (r) to a nominal annual rate (R)====
 
R = r x n
 
====To convert from a nominal annual rate (R) to a periodic rate (r)====
 
r = R / n
 
 
====<span style="color:#4B0082">'''Example 2'''</span>====
 
GBP interest is quoted at a nominal annual rate of 5.11% for daily interest calculation.
 
Calculate the periodic rate per day.
 
 
r = R / n
 
= 5.11% / 365
 
= 0.014%
 
 
 
====<span style="color:#4B0082">'''Example 3'''</span>====
 
The periodic rate for GBP interest is 0.01% per day.
 
Calculate the nominal annual rate.
 
 
R = r x 365
 
= 0.01% x 365
 
= 3.65%




== See also ==
== See also ==
* [[Continuously compounded rate of return]]
* [[Arbitrage]]
* [[Coupon rate]]
* [[Bubble]]
* [[Daily rate]]
* [[Calendar effect]]
* [[Day count conventions]]
* [[Carry trade]]
* [[Effective annual rate]]
* [[Day trading]]
* [[Forward yield]]
* [[Default]]
* [[Money market]]
* [[Forward contract]]
* [[Nominal]]
* [[Futures contract]]
* [[Periodic discount rate]]
* [[FX instrument]]
* [[Periodic rate of interest]]
* [[Hedging]]
* [[Periodic yield]]
* [[Investment]]
* [[Quarterly rate]]
* [[Market manipulation]]
* [[Rate of return]]
* [[Naked]]
* [[Semi-annual rate]]
* [[Riding the yield curve]]
* [[Nominal annual yield]]
* [[Risk management]]
* [[Rogue actor]]
* [[Rogue trader]]
* [[Speculative]]
* [[Speculator]]
* [[Straddle]]
* [[Uncovered arbitrage]]
* [[Uncovered interest arbitrage]]


[[Category:Manage_risks]]
[[Category:Financial_risk_management]]

Latest revision as of 01:03, 13 March 2023

1. Risk.

Any risk taking activity or decision which depends for its favourable result on market rates or prices.

For example, a decision to leave a natural operational exposure unhedged, or a decision not to buy a relevant insurance contract.


2. Market manipulation.

Intentionally creating market positions - for example by buying or selling assets or derivative contracts - in the hope of making profits from favourable changes in market rates or prices.

For example, buying an asset in the hope that its market price will rise in the short term.


3. Market pricing.

Similar position-taking activity which depends for its favourable result on there being no material change in prevailing market rates, prices or conditions.

For example, selling straddle options (being one of the speculative activities undertaken by the Barings Bank ‘rogue trader’ Nick Leeson).

Another example would be a decision to operate without committed credit lines, or a decision to ride the yield curve.


See also

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