Hot Money

What is Hot Money?

This is the money that flows in regular interval between different financial markets as investors make their best to make sure that they receive the maximum short-term interest rates possible. Hot money typically flows from countries yielding low interest rate to the ones with higher interest rates. This flow is executed by investors who want to make the highest ROI (return of investment).
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These financial transfers usually have a sound influence on the exchange rate when the sum is high, and therefore, alter the balance of payment significantly.

Banks generally try to pull hot money by offering comparatively shorter-term certificates of deposit (with higher than average interest rates). With the institution reducing the interest rate (or with a higher interest in offering from another institution), investors with hot money at their disposal start withdrawing their funds and then shift that money to another institution offering higher rate.

Edited and Updated 15th February 2014

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