The Business Book

128

BORROW SHORT,

LEND LONG

MAKING MONEY FROM MONEY

S

ome companies opt to

“make money from money.”

This means they use their

cash assets not only to further the

development of their products, but

also to generate money through

the financial markets. Some

companies believe that by making

hedges (bets) on the fluctuations of

the currency markets, for example,

they can gain access to a new

source of profit. The two terms that

exemplify the idea of making

money from money are “treasury

function” and ”shadow banks.”

Hedge betting

“Treasury function” is a term that

emerged in the late 1970s in the

wake of economic challenges, such

Companies with a good cash flow and liquidity

can make money from money, by...

But this can prove to be a

money-losing exercise if there is

a crash in markets or the economy.

...investing in financial

products such as

derivatives and

futures contracts.

...borrowing short-

term and lending to

customers long-term,

like a bank.

Making money from money is a risky,

short-term strategy.

IN CONTEXT

FOCUS

Financial products

KEY DATES

c.1650 A rice market in

Osaka, Japan issues the first

standardized futures contract,

agreeing to prices for goods

not yet delivered.

1970s and 80s Deregulation

gives banks and companies

more ways to use money to

make money.

1973 US economists Fischer

Black and Myron Scholes

devise a mathematical formula

that appears to take the risk

out of futures contracts.

1980s Large corporations

begin to use derivatives to

make money from money.

2007–08 Financial markets

collapse around the world,

threatening the continued

existence of banks and

banking-type ventures.