Archive for the ‘Question of the Day’ Category

« Older Entries
Newer Entries »

Belgium but not Britain? Doesn’t Euro mean Europe?

Tuesday, October 27th, 2009

If you traveled through Europe before 2002, you probably had a lot of fun juggling the different currencies and their crazy exchange rates. You could spend 20 francs on a coffee in Paris and then in Italy it would cost 5000 lira – a bit confusing. But today, you’ll pay for that coffee in Italy and in France with the same bill: the euro.

Even though it’s called the euro after (you guessed it) Europe, its name is a little misleading. There are 45 countries in Europe but only 27 of them have joined the European Union. Out of those 27, only 16 use the euro as their official currency. That’s means only about 1/3 of Europe actually uses the euro! Why so few though?

There are several reasons why:

  1. You have to be a member of the European Union to adopt the euro as your currency. There are 18 countries who don’t belong, including Switzerland (which geographically is the center of Europe).
  2. You must follow strict financial guidelines to be allowed to have the euro; some countries (like Poland) have yet to meet them.
  3. Lastly, you have to want it. Some countries like Britain, Denmark, and Sweden don’t want the euro as their official currency. (If Mexico wanted us to jointly adopt the same currency, we probably would say no as well because of the effect Mexico’s weaker economy would have on our own.)

As Europe continues to loosen the national borders that divide it, the Euro will continue to be adopted by more and more countries. Probably soon, you won’t remember what it was like to carry 20 different currencies in your pocket while visiting only one continent.

Why can it be good to borrow money?

Friday, October 23rd, 2009

It’s a good question: loans come with interest, so you always have to pay back more than you borrowed. How is borrowing possibly a good idea?

Say you want to buy a house. Houses aren’t cheap, but they’re generally necessary (unless you want to live in your car). Especially if you’re fairly young and just starting out, chances are you probably can’t afford to just drop the full value of that house, in cash, up front, into the seller’s lap. But if you take out a mortgage to pay for the house, you can pay it back a little at a time. True, you’ll end up paying back more over time than if you’d just paid up front, but presumably you’ll be making more money as your life progresses, and then mortgage payments will count for less of your budget.

When you’re pumping gas, what are you really paying for?

Friday, October 23rd, 2009

To understand what you pay for at the pump, first you should know where gas comes from. Gasoline is made from crude oil – the black oil that shoots up from the ground. Somebody’s got to collect it all and then refine it into a usable form. From there, it’s shipped all over the world to companies who market and distribute it to stations across their respective countries (think Shell, Texico, Chevron, etc.). Lastly, your local, state, and federal governments add taxes onto the cost of each gallon. From there, gas stations are happy to accept your money in cash, debit, or credit.

While your money goes directly to the gas station, it is really paying for all of these production stages. In total, you pay for the discovery, extraction, and shipment of crude oil; the refinement of oil into gasoline; the shipping, distribution, and marketing of gas by oil companies; the costs of running a gas station; and the taxes levied by the government. Simply put, you’re paying for it all!

How does a hedge fund manager actually make money?

Friday, October 23rd, 2009

The term “hedge fund” can actually be somewhat misleading – not many hedge funds actually hedge their investments. Hedging is a strategy that reduces the risk of a business transaction. Hedge funds use many different investment strategies, but they often engage in high-risk trading because their goal is to make as much money as possible as quickly as possible, which is different from, say, an index mutual fund that just tries to outperform an index (for example the S&P500). What really distinguishes hedge funds is how hedge fund managers get paid: management fee plus a performance fee.

Just graduated and they’re already hitting you up for an alumni donation? What’s the point?

Friday, October 23rd, 2009

“Hello, my name’s Susan and I’m calling you about your beloved alma mater… How about starting with a small monthly donation of $200?”

Sound familiar? Every graduate receives these calls seemingly moments after that graduation cap tassel crosses from right to left. Alumni donations have a large impact on colleges for several reasons and so they are solicited with what may appear to be overzealous enthusiasm. You may wonder how these people expect a new graduate to be able to donate anything. Don’t you need a job first?

Well, while your school is definitely hoping for a sizable check, that’s actually not the main reason for the unsolicited call. A large part of a school’s ranking is based on the rate of alumni donations – the percentage of graduates who give back to their school. By encouraging you to donate, sometimes even as little as $1, colleges are trying to maintain or even boost a significant factor in ratings determination. They also want to get you in the habit of giving.

While the size of your alumni donation right now might not be close to Warren Buffet’s, it still has a big impact on how your school is ranked and your giving patterns in the future.

What’s the difference between futures and options?

Wednesday, October 21st, 2009

Options and futures are both contracts under which you agree to buy or sell an asset at a later date, but the main difference is that options offer you just that – an option to buy. You have to pay a premium for an option, but in return you are not obligated to do anything: you can choose to buy the agreed-upon assets at any time during the period set out in the contract, but you are never required to do so.

Futures contracts come with no premium attached, but they do impose obligations on both buyer and seller. When the predetermined time comes, the buyer absolutely must buy the assets, and the seller must sell them. In addition, the value of the assets used in futures contracts are usually greater than those used for options, so there’s much more risk in a futures contract: by the time you have to buy (or sell) your assets, their value may have changed dramatically, for better or for worse, but you still have to buy (or sell) at the price agreed upon when the futures contract was drawn up.

When is a pig better than cash?

Wednesday, October 21st, 2009

For many of the poorest people around the world, holding onto cash is just as difficult as getting their hands on it in the first place. For one thing, lacking food or basic necessities, there are immediate needs that cash will go to right away. Nothing is invested, which makes it harder for a person to make more money and eventually, escape from poverty. Too many hungry children or parents in desperate need of medicine siphon off cash as soon as it appears, trapped in an endless cycle of poverty.

For this reason, many microfinance and poverty-alleviation institutions are making loans of durable goods like pigs, bicycles, or refrigerators rather than cash. These are called in-kind loans. It’s much harder to give away pieces of a pig (until it’s eventually butchered of course), so it tends to last longer – hopefully long enough to grow from a small, inexpensive piglet to a fat hog that will fetch a good price at the market and allow its owner to repay the loan and, hopefully, reinvest the profit.

This isn’t to say that cash loans don’t help – they can save lives – but it’s also important that the people receiving the loan know how and are able to turn that cash into a durable asset that will reap greater returns and profit in the long term.

What happens when you pay your credit card bills late?

Tuesday, October 20th, 2009

When you don’t pay credit card bills on time, your credit score takes a hit, and a low credit score makes your life difficult in multiple ways. Your credit score basically reflects how trustworthy you are when it comes to paying back credit, and any time you need credit or insurance, the lenders involved are going to look at your credit score. A low credit score may be enough reason for a lender to refuse you a loan outright or for an insurer to decide you’re too risky, and even if you are granted credit, it may be at a higher interest rate or with stricter terms and conditions.

Although different companies calculate credit scores differently, paying your bills late is one thing that’s basically guaranteed to lower it. Paying on time, however, has the opposite effect, and the longer you go without missing a payment, the better your credit score looks. Basically, a high credit score tells credit and insurance companies that you’re a responsible person, and they’ll treat you better for it – it’s a way to make a good impression from the start.

Who is Warren Buffet?

Tuesday, October 20th, 2009

Warren Buffet, a.k.a. the “Oracle of Omaha,” has become famous and extremely rich by making very successful investments through his company Berkshire Hathaway, which was a textile firm when he took it over in 1965. Today he owns controlling stakes in insurance companies like GEICO and General Re, utilities like MidAmerican Energy (MDPWK.PK), and food companies like Dairy Queen and See’s Candies, in addition to large stakes in Coca-Cola (KO), Wells Fargo (WFC) and various other companies. In 2008, he was listed as the world’s richest man with more than $60 billion. Berkshire Hathaway’s stock (BRK-A), has the most expensive share price in the world at around $100,000 a share, but lost a bunch of value since 2008, depleting Warren Buffet’s fortune by an astounding $25 billion in just a year. Poor guy only has about $37 billion left with which to scrape by!

Recently however, the famous investor is also a world-class philanthropist, dedicating 85% of his fortune to charity. Most of the money will be going to the Bill and Melinda Gates Foundation, which Bill Gates runs full time having left his job at Microsoft to devote himself to philanthropy. The rest will go to foundations headed by his three kids. He has said that whatever is left of his fortune will go to philanthropy when he dies, if not before. Even if his fortune weren’t to increase in value at all before that time, those $37 billion dollars would be the largest philanthropic contribution in history. Warren Buffet and Bill Gates provide outstanding examples of all the good that can be accomplished when accomplished people dedicate their time and resources to helping others.

« Older Entries
Newer Entries »