WHAT IS A SPECULATIVE BUBBLE?

A speculative bubble is a rapid increase in investment activity that drives prices up to very high levels. The rapid inflation of the bubble can attract more investors, creating a juggernaut as people move quickly to take advantage of the potential profits. Eventually, such bubbles burst, driving prices well below their market value before they equalize again. A number of examples have occurred around the world, illustrating a tendency for investors to create bubbles in financial markets.

Initially, a speculative bubble may develop for very sound reasons. Investors could begin buying products or shares that are likely to increase in value, such as land in a region where the government is preparing to build a road. Their purchases are in alignment with market logic, as they can expect to make a sale at a profit at some point in the future. As investment activity picks up, however, the investors may unwittingly create a bubble.

The number of buyers can increase, creating ferocious competition for products. This drives the prices up, as sellers can afford to wait for the best offer and may counteroffer if they think they can get a better deal. Fed by increasing activity, which suggests something of financial importance is occurring, investors may flock to the speculative bubble. More investors push the prices well up beyond market value, creating fragility in pricing as the prices paid skew out of alignment with reality.

While a speculative bubble may start out with logical investment activity, sometimes by very sound investors and early adopters who are quick to identify trends, it can get out of control. Investors may be driven by internal psychology more than market forces and a feeding frenzy around a given investment can occur. When the bubble bursts, prices can crash particularly hard as investors suddenly realize the value was grossly inflated. Those left holding purchases they made at high prices may take a significant loss, as prices may be unlikely to rise that high again.

Some investors can make profits from a speculative bubble. This includes not just those who buy early and sell when prices are high, but also people who utilize financial derivatives in their investment strategy. These products, like options and swaps, allow people to make bets on the direction of the market. Whether the market goes up or down, if they make sound predictions about market trends, investors can make money. Such activities can be challenging and require skill as well as nerve for the best outcome.

Match the English words and word combinations with the Ukrainian equivalents.

3. Explain in your own words the meaning of the following notions (1-2 sentences per each term):

1. A juggernaut

2. To counteroffer

3. Early adopters

4. A feeding frenzy

5. To be grossly inflated

6. Options and swaps

TEXT 12

1. Read the text and answer the following questions:

1. What is a return on capital?

2. What relationships are typically measured in order to determine a return on capital?

3. How can the results of a return on capital calculation be used?

4. What does a return on capital that decreases with each successive time period signify?

5. What are possible directions of changes in business operation that may lead to the increase of a return on capital?

6. What are possible reasons for a return on capital being less than projected?

WHAT IS RETURN ON CAPITAL?

A return on capital is a means of measuring how well a given company invests funds in its basic business operation. While there are various formulas used to determine this particular relationship between those invested funds and the returns generated as the result of those funds, many companies find that identifying the return on capital is very important to determining the financial strength of the business, and finding ways to aid the company in achieving additional growth over time. Typically, the means of determining a return on capital will focus on the pretax income that is generated in comparison to the amount of the funds that the company invests in the business.

One common approach to determining a return on capital involves identifying the amount of net income that is generated during a given period of time, after excluding any amount of after-tax interest expense that may have occurred during that period. The resulting figure is divided by the average capital relevant to the period. The amount of that return on capital can then be used as part of the assessment of the overall business operation, and may form the basis for making changes if the return is not considered sufficient for the amount of funds invested in the operation.

A return on capital that decreases with each successive time period may be a sign that the company needs to look closely at operational expenses and other expenditures and make some changes in how the business operates. The changes may involve strengthening the sales and marketing effort as a means of attracting more customers and boosting sales. At the same time, a low return on capital may trigger an investigation into the operational structure that results in changing policies and procedures so that the business lowers costs and generally operates more efficiently. This in turn can have a positive impact on net profits and cause the downward trend in the capital returns to cease and allow the fortunes of the business to begin increasing once more.

There is no one reason why a return on capital would be less than anticipated. At times, the original projections of the return may have been more hopeful than factual. Even if those projections were realistic, the lower returns may be due to some event or series of events that was not foreseen when the capital was originally invested in the operation. For this reason, taking the time to determine what led to the return on capital is important, both from the perspective of capitalizing on those positive factors in the future and minimizing the impact of any negative factors in subsequent periods.

2. Find the English equivalents for the following words and word combinations in the text:

1. Дохідність капіталу

2. Дохід до оподаткування

3. Чистий прибуток

4. Операційні витрати

5. Витрати

6. Маркетингові заходи

7. Споживачі

8. Збільшити продажі

9. Організаційна структура

10. Тенденція до зменшення

11. Прогнозування

3. Explain the meaning of the following words and word combinations in your own words (1-2 sentences per each term):

1. Financial strength

2. To invests in the business

3. Business operation

4. Company`s policy

5. Downward trend

6. To capitalize

TEXT 13

1. Read the text and answer the following questions:

1. What is financial risk? What is its main goal?

2. What is the procedure of assessing possible financial risks by shareholders?

3. How can financial risks be determined and minimized by corporations?

4. What is typically in the focus of a best case and a worst case scenario projected by an investor as part of financial management?

5. What is a correlation between levels of financial risk and the amount of possible earnings got by an investor?

6. To what extent can the necessity of evaluation of financial risk be dependent on its amount?

WHAT IS FINANCIAL RISK?

Financial risk is the amount of chance that is present with any type of financial investment. Typically, the goal is to secure investments that appear to have a low amount of risk since these are more likely to earn a return. Both individual and corporate investors access the degree of risk present before executing an order to buy shares on any investment market.

Shareholders usually investigate the degree of financial risk present in any investment deal by exploring both the current and past performance of the stock option. The shareholder will also consider any changes in the current financial climate that could either cause the option to increase dramatically in value or cause the option to drop. Knowing this detail will help the investor determine how owning the option will affect his or her overall financial stability.

Corporations also engage in the process of assessing financial risk. In terms of property purchases, there is attention given to the ability to build up equity in the acquisitions, or how to make the most of equity financing strategies. The company will also want to maintain an adequate cash flow, so that even if the acquisition does not appreciate as quickly as projected, the finances of the business remain stable.

As part of competent financial management, the investor will often project both a best case and a worst case scenario. With the best case scenario, the object is to assess the maximum possible return on the investment within a given amount of time. The worst case scenario will focus on a possible loss of most or all of the investment, including how an event of this type would impact cash flow or hinder the investor from meeting all current financial obligations.

What is considered to be an acceptable level of financial risk will vary from one investor to another. Some investors prefer to focus on acquiring financial instruments such as stocks or bonds that have a very low amount of risk. While the returns tend to be modest, they are consistent and considered relatively safe. Other investors choose to go with a finance strategy involving the acquisition of more volatile stock options, in the hopes of earning a greater return in a short period of time. In order to do this, they understand that there is a greater degree of risk present, so the opportunity to lose money is more pronounced.

Regardless of the preferences of the investor, it is always a good idea to assess the financial risk before investing in any stock, bond, commodities, money market, or property deal. As long as the investor understands what risks are present and can balance them against the potential rewards, it is possible to make an informed decision on what to purchase and what to avoid.

2. Find words in the text which mean the following:

1. The possibility that an organization will not be able to meet its monetary commitments, notably any debt-related payments.

2. The purchase of assets, capital goods etc., with a primary view to their financial return, either as income or capital gain.

3. A person or company holding shares in a company.

4. A right to buy shares in a company on some future date at a pre-arranged price.

5. The general condition of the financial situation in a particular country or in the world.

6. An absence of excessive fluctuations in the financial situation.

7. The buying or obtaining of assets or objects.

8. The total amount of money being transferred into and out of a business

9. The profit of an organization year according to a percentage of the capital employed.