Hot money

Money that moves across country borders in response to interest rate differences and that moves away when the interest rate differential disappears.

Hot Money

Funds that an investor moves from one investment vehicle to another in response to higher interest rates. For example, an investor may move hot money from an investment-grade bond to a certificate of deposit at another institution where the certificate of deposit has a higher return. Likewise, one may move funds from one country to another when interest rates in the second country are higher. Hot money may be moved when a country or institution lowers its interest rates.

hot money

Funds that are controlled by investors who seek high short-term yields when the funds are likely to be reinvested somewhere else at any time. Some financial institutions attract hot money by offering above-average yields on certificates of deposit. However, if the rate is lowered, the funds are likely to be lost to another institution or investment.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

hot money

short-term CAPITAL INFLOWS and CAPITAL OUTFLOWS between countries which occur in anticipation of likely EXCHANGE RATE changes (devaluations and revaluations), or in response to INTEREST RATE differentials between financial centres. See SPECULATION, ARBITRAGE.

hot money

short-term and volatile CAPITAL MOVEMENTS between countries that take place primarily in response to interest rate differentials between financial centres (ARBITRAGE) or in anticipation of likely DEVALUATIONS or DEPRECIATIONS and REVALUATIONS or APPRECIATIONS of foreign currencies (SPECULATION). Speculative hot-money flows are especially disruptive to the conduct of ‘orderly’ exchange-rate management and the maintenance of balance-of-payments equilibrium, and are thus sometimes subjected to FOREIGN EXCHANGE CONTROL regulation by the authorities. See CAPITAL INFLOW, CAPITAL OUTFLOW.