FinTech Terms

Basic Finance Terms and Concepts:

I've always had a passion for managing my personal finances, but my background was more rooted in mathematics and science. This meant I had to play catch-up with the intricate terminology of the stock market. After a while, I came to the realization that getting organized was crucial. That's when I started compiling a list of terms and concepts that I found vital, especially when transitioning from traditional finance to the rapidly evolving world of decentralized finance (DeFi).

1. Liquidity

Availability of assets on a market

2. Market Makers

Role AS MIDDLEMEN:

• To maintain liquidity and efficiency of market for securities(stocks and bonds)
• To continualy quote bid and ask prices for financial securities

Perspectives:

1. Buyer
   • bid
2. Seller
   • ask
3. Maintainer
   • order book manager
4. Arbitrage
   • take advantage of price differences
5. Compliant
   • Adhere to regulatory frameworks

3. Basis Points in Finance

Basis points, often abbreviated as "bps," are a unit of measure used in finance to express changes in interest rates, bond yields, or other financial percentages. One basis point is equal to 1/100th of a percentage point or 0.01%.

In the financial world, especially in fixed income markets, interest rates and yields are crucial. When discussing small changes in these rates or yields, using basis points provides a more precise and standardized way of communication. For instance:

    - If an interest rate increases from 3% to 3.25%, the change is 25 basis points.
    - A bond yield moving from 5.75% to 6.05% represents a change of 30 basis points.
    - When central banks adjust rates, say from 1% to 1.25%, that's a shift of 25 basis points.

Expressing changes in terms of basis points helps in conveying precise adjustments, especially in contexts where even small changes matter significantly. It's a universal metric that enables clearer communication across different financial instruments and markets, allowing for easier comparison and analysis.

For example, in lending or borrowing, a bank might increase its interest rates by 50 basis points on a loan, signifying a half-percentage point increase. Similarly, in bond markets, a change in yield by 10 basis points might indicate a shift in investor sentiment or market conditions.

Overall, basis points are a vital tool in finance for quantifying and discussing changes in interest rates, yields, spreads, and other financial percentages with accuracy and consistency.

4. 1.0001

In finance and fintech, the use of 1.0001 or a very similar figure often appears in calculations involving interest rates, particularly when computing continuously compounded interest or when dealing with very small interest rate differentials.

The number 1.0001 represents a slight increase or growth of 0.01% (or 1 basis point) when added to the value of 1. For instance, if you multiply 1.0001 by itself repeatedly, you're essentially calculating the effect of continuously compounding a 0.01% interest rate change.

The formula for continuously compounded interest is given by:
A=P×e^rt
Where:
    A = the resulting amount after compounding
    P = the principal amount
    r = the interest rate per period
    t = the time the money is invested for
    e = the base of the natural logarithm (approximately 2.71828)

When interest rates are relatively small, such as 0.01% (or 1 basis point), the use of 1.0001 (or a figure very close to it) allows for an approximation of the continuously compounded interest formula without having to perform complex calculations involving exponential functions.

For example, in high-frequency trading or financial modeling where even the smallest changes matter, traders or analysts might use 1.0001 to quickly estimate the impact of a 1 basis point change in interest rates on the value of financial instruments or portfolios.

This approximation can simplify calculations while still providing a reasonably accurate representation of the effect of small interest rate changes over short periods, especially when compounded continuously. However, it's important to note that this method is an approximation and might not be suitable for all situations, especially when higher precision is required

5. Long

   • Calculation:
     • Profit: (Current value of the position - Entry value of the position)
     • Formula: (Position's size in tokens * Current market price) - (Position's size in tokens * Average entry price)

6. Short

   • Calculation:
     • Profit: (Entry value of the position - Current value of the position)
     • Formula: (Position's size in tokens * Average entry price) - (Position's size in tokens * Current market price)

7. Order size

   • States:
     • Fulfilled, Pending, or Failed

8. Position Size

   • Position States:

     A. Profitability:

     1. Winning/Profitable
     2. Losing/Unprofitable
     3. Breakeven

     B. Holding:

     1. Long-term
     2. Short-term

     C. Risk:

     1. High
     2. Low

     D. Leverage:

     1. Over-leveraged
     2. Hedged

     E. Realization:

     1. Realized
        • Closed positions
        • Profit/loss already incurred
     2. Unrealized
        • Open positions
        • Profit/loss not known

   • Position Types:

     A. Price Movements Impacted:

     1. Long
        • Buying first, selling later
     2. Short
        • Selling first, buying later

     B. Price Movements Agnostic:

     3. Flat

     Strategies to Minimize Price Movements:

     1. Hedged position
     2. Leveraged
     3. Unleveraged
     4. Arbitrage
     5. Options
        • Rights or obligations tied to:
          • Price movement
          • Date
     6. Margin positions
        • Borrowing funds against existing assets

9. Flow

   • User Orders:
     • Order Properties:
       • Size
       • Changes in order size affecting user position

10. Collateral Price

    • Inquiries:
      • Who determines the collateral price?
      • Its origin/source?
      • Frequency of obtaining this price?