Hot Money: Do the benefits outweigh the costs?
With poverty levels at an all time low, people today have more disposable income  than ever. Those savvy enough have now turned away from purely saving their money in bank accounts to more sophisticated investment routes. With the technological and financial advancements  nowadays, numerous different investment opportunities present themselves allowing investors to make quick speculative returns  easily. One of which is hot money investing, this strategy doesn't only benefit investors but sometimes it benefits the market they flow in. The question now is, do the benefits of hot money investments outweigh the costs?
Question 1: What is Hot Money?
  • Hot money is foreign currency that regularly flows i n and out of financial markets seeking the best short term returns. Typically this happens in low interest rate countries, capital flies out of their market and lands into markets that offer more lucrative short term interest. 
  • Although the bulk of hot money is usually concentrated in treasury securities, the private sector sometimes gets in the action. Some banks offer short term certificates of deposit with higher returns to attract hot money investors. But once the bank lowers the interest back to normal levels the speculative investors move on to better investment opportunities.
  • Businesses ought to keep an eye out for hot  money investors and try  avoiding  them; they tend to drop out at any sign of difficulty or challenge and won't be there to support the company.
Question 2: What are the benefits of inbound Hot Money?

Question 3: Does Hot Money have a dark side?

Question 4: What can Emerging Markets do to protect against Hot Money flows?

We can conclude that...

In a nutshell, hot money can be beneficial to the countries in terms of foreign reserves and as a signal for a flourishing economy. However, the disadvantages cannot be neglected, the phenomenon is a short term one and will come to an end eventually and by that time the macroeconomic disasters will have struck. In order to balance out the hot money's disadvantages, governments have to exercise control strategies and monitor their foreign reserves so that they don't become too dependent on these volatile investments .
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