Business, Legal & Accounting Glossary
The capital which is frequently transferred between financial institutions in an attempt to maximize interest or capital gain.
In economics, hot money is the flow of funds from one country to another in order to earn a short-term profit on interest rate differences and/or anticipated exchange rate shifts.
Hot money refers to that money, which traverses among financial markets in response to the highest available rates of interest. CDs can be termed as hot money. Hot money moves quickly from one form of investment to another in pursuit of the highest short-run rate of interest (rate of return). Hot money seeks to garner high short-run investment returns. Hot money flies in response to international exchange rate differentials. Hot money affects BOP (balance of payment) of nations. It fortifies the exchange rate of the recipient nation while weakening that of the concerned country from which money flies out.
In currency markets, mostly speculators hold hot money. Hot money is extremely volatile. It is a major component of ‘capital flight’. Hot money flight is often the root cause of a currency crisis. In the 1900s, Mexico and Asia were victims of such crisis. With a view to cut down on volatility rising from hot money, some countries like Chile have stipulated minimum time limit for investment. This type of restrictions contains the issue of capital flight while losing out some investment in the bargain. Financial crises, as well as booms mostly in developing nations, are closely related to the issue of capital flight. Plus it has been observed that nations with weak macroeconomic fundamentals are more susceptible to an economic crisis.
Some conventional types of hot money are mentioned below.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Hot Money are sourced/syndicated and enhanced from:
This glossary post was last updated: 4th April, 2020 | 3 Views.