Hot money

Short-term capital that crosses borders chasing yield or sentiment and leaves as quickly as it came. Its sudden inflows and reversals destabilise asset prices and exchange rates.

Where you will meet it

Hot money appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain what governments aim to achieve by restricting capital flows
  CFA Level I · Economics

  “Governments restrict capital flows for several reasons: to reduce the volatility of domestic asset prices caused by sudden inflows and outflows of hot money, to help maintain a fixed exchange rate, to keep domestic interest rates below world levels without capital fleeing abroad, and to protect strategic industries from foreign ownership.”

• Set out why central banks or governments intervene in currency markets or impose capital controls, and how well such measures work
  CFA Level II · Economics

  “Authorities intervene or impose capital controls to damp volatility, resist appreciation that hurts exporters, defend a peg, or slow hot money flows and asset bubbles.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with H · Glossary