This document provides definitions and explanations of several key financial concepts: - Comparative advantage refers to a country's ability to produce a good at a lower opportunity cost than another country. Trade allows both countries to benefit even if one is more efficient in all goods. - Compound interest accrues interest on prior interest amounts, increasing the overall return at a faster rate compared to simple interest. Disclosing compounding frequencies helps consumers compare borrowing costs. - Contango refers to futures prices being higher than expected future spot prices, incentivizing storage of the commodity by hedgers and speculators. - Several concepts are defined in 1-2 sentences, including deflation, deleveraging, discounted cash flow analysis,

1. FINANCIAL CONCEPTS

2. COMPARATIVE ADVANTAGE
• In economics, comparative advantage refers to the ability of a party to produce a
particular good or service at a lower marginal and opportunity cost over another.
Even if one country is more efficient in the production of all goods (absolute
advantage in all goods) than the other, both countries will still gain by trading with
each other, as long as they have different relative efficiencies.
• For example, if, using machinery, a worker in one country can produce both shoes
and shirts at 6 per hour, and a worker in a country with less machinery can produce
either 2 shoes or 4 shirts in an hour, each country can gain from trade because their
internal trade-offs between shoes and shirts are different. The less-efficient country
has a comparative advantage in shirts, so it finds it more efficient to produce shirts
and trade them to the more-efficient country for shoes. Without trade,
its opportunity cost per shoe was 2 shirts; by trading, its cost per shoe can reduce to
as low as 1 shirt depending on how much trade occurs (since the more-efficient
country has a 1:1 trade-off). The more-efficient country has a comparative
advantage in shoes, so it can gain in efficiency by moving some workers from shirt-
production to shoe-production and trading some shoes for shirts. Without trade, its
cost to make a shirt was 1 shoe; by trading, its cost per shirt can go as low as 1/2
shoe depending on how much trade occurs.

3. COMPOUND INTEREST
• Compound interest arises when interest is added to the principal of a deposit
or loan, so that, from that moment on, the interest that has been added also
earns interest. This addition of interest to the principal is called compounding.
A bank account, for example, may have its interest compounded every year: in
this case, an account with $1000 initial principal and 20% interest per year
would have a balance of $1200 at the end of the first year, $1440 at the end of
the second year, and so on.
• In order to define an interest rate fully, and enable one to compare it with other
interest rates, the interest rate and the compounding frequency must be
disclosed. Since most people prefer to think of rates as a yearly percentage,
many governments require financial institutions to disclose the equivalent
yearly compounded interest rate on deposits or advances. For instance, the
yearly rate for a loan with 1% interest per month is approximately 12.68% per
annum (1.0112 − 1). This equivalent yearly rate may be referred to as annual
percentage rate (APR), annual equivalent rate (AER), effective interest
rate, effective annual rate, and by other terms. When a fee is charged up front
to obtain a loan, APR usually counts that cost as well as the compound interest
in converting to the equivalent rate. These government requirements assist
consumers in comparing the actual costs of borrowing more easily.

4. CONTANGO
• Contango is a situation where the futures price (or forward price) of a
commodity is higher than the expected spot price.
• In a contango situation hedgers (commodity producers and commodity users)
or arbitrageurs/speculators (non-commercial investors), are "willing to pay
more for a commodity at some point in the future than the actual expected
price of the commodity. This may be due to people's desire to pay a premium to
have the commodity in the future rather than paying the costs of storage and
carry costs of buying the commodity today."
• The opposite market condition to contango is known as
normal backwardation. "A market is "in backwardation" when the futures price
is below the expected future spot price for a particular commodity. This is
favorable for investors who have long positions since they want the futures
price to rise."

5. DEFLATION
• In economics, deflation is a decrease in the general price level of goods and
services. Deflation occurs when the inflation rate falls below 0% (a
negative inflation rate). This should not be confused with disinflation, a slow-
down in the inflation rate (i.e., when inflation declines to lower levels).
Inflation reduces the real value of money over time; conversely, deflation
increases the real value of money – the currency of a national or regional
economy. This allows one to buy more goods with the same amount of money
over time.
• Economists generally believe that deflation is a problem in a modern economy
because it increases the real value of debt, and may aggravate recessions and
lead to a deflationary spiral. Historically not all episodes of deflation
correspond with periods of poor economic growth. Deflation occurred in the
U.S. during most of the 19th century (the most important exception was during
the Civil War). This deflation was caused by technological progress that created
significant economic growth. This deflationary period of considerable
economic progress preceded the establishment of the U.S. Federal Reserve
System and its active management of monetary matters.

6. DELEVERAGING
• At the micro-economic level, deleveraging refers to the reduction of
the leverage ratio, or the percentage of debt in the balance sheet of a single
economic entity, such as a household or a firm. It is the opposite of leveraging,
which is the practice of borrowing money to acquire assets and multiply gains
and losses.
• At the macro-economic level, deleveraging of an economy refers to the
simultaneous reduction of debt levels in multiple sectors, including private
sectors and the government sector. It is usually measured as a decline of the
total debt to GDP ratio in the national account. The deleveraging of an economy
following a financial crisis has significant macro-economic consequences and is
often associated with severe recessions.

7. DISCOUNTED CASH FLOW
• In finance, discounted cash flow (DCF) analysis is a method of valuing a
project, company, or asset using the concepts of the time value of money. All
future cash flows are estimated and discounted to give their present
values (PVs)—the sum of all future cash flows, both incoming and outgoing, is
the net present value (NPV), which is taken as the value or price of the cash
flows in question. Present value may also be expressed as a number of years'
purchase of the future undiscounted annual cash flows expected to arise.
• Using DCF analysis to compute the NPV takes as input cash flows and a
discount rate and gives as output a price; the opposite process—taking cash
flows and a price and inferring a discount rate—is called the yield.
• Discounted cash flow analysis is widely used in investment finance, real estate
development, corporate financial management and patent valuation.

8. DIVISION OF LABOUR
• The division of labour is the specialisation of cooperating individuals who
perform specific tasks and roles. Historically, an increasingly complex division
of labour is associated with the growth of total output and trade, the rise
of capitalism, and of the complexity of industrialized processes. The concept
and implementation of division of labour has been observed in
ancient Sumerian(Mesopotamian) culture, where assignment of jobs in some
cities coincided with an increase in trade and economic interdependence. In
addition to trade and economic interdependence, division of labour generally
increases both producer and individual worker productivity.
• In contrast to division of labour, division of work refers to the division of a
large task, contract, or project into smaller tasks — each with a separate
schedule within the overall project schedule.Division of labour, instead, refers
to the allocation of tasks to individuals or organisations according to the skills
and/or equipment those people or organisations possess. Often division of
labourand division of work are both part of the economic activity within an
industrial nation or organisation.

9. DOMESTIC LIABILITY DOLLARIZATION
Domestic liability dollarization (DLD) refers to the denomination of banking
system deposits and lending in a currency other than that of the country in which
they are held. DLD does not refer exclusively to denomination in US dollars, as DLD
encompasses accounts denominated in internationally traded "hard" currencies
such as the British pound sterling, the Swiss franc, the Japanese yen, and the Euro
(and some of its predecessors, particularly the Deutschmark).

10. DOWN PAYMENT
Down payment (or downpayment) is a payment used in the context of the
purchase of expensive items such as a car and a house, whereby the payment is the
initial upfront portion of the total amount due and it is usually given in cash at the
time of finalizing the transaction. A lo’an or the amount in cash is then required to
make the full payment.

11. DOWNSIDE RISK
• Downside risk is the financial risk associated with losses. That is, the risk of
difference between the actual return and the expected return (when the actual
return is less), or the uncertainty of that return.
• Risk measures typically quantify the downside risk, whereas the standard
deviation (an example of a deviation risk measure) measures both the upside
and downside risk. Specifically, downside risk can be measured either
with downside beta or by measuring lower semi-deviation. The
statistic below-target semi deviation or simply target semi deviation (TSV) has
become the industry standard.

12. DOWNSIDE RISK V/S CAPM
It is important to distinguish between downside and upside risk because security
distributions are non-normal and non-symmetrical. This is in contrast to what
the capital asset pricing model (CAPM) assumes: that security distributions are
symmetrical, and thus that downside and upside betas for an asset are the same.
Since investment returns tend to have non-normal distribution, however, there in
fact tends to be a different probability for losses and for returns. The probability of
losses is reflected in the downside risk of an investment, or the lower portion of
the distribution of returns. The CAPM, however, includes both halves of
a distribution in its calculation of risk. That is why it is crucial to not simply rely
upon the CAPM, but rather to distinguish between the downside risk, which is the
risk of losses, and upside risk, or gain. Studies indicate that "around two-thirds of
the time standard beta would under-estimate the downside risk.