Financial Terms-I

1) L,V and U
These alphabets refer to the types of recessions(i.e. L-shaped, V-shaped and U-shaped ones) according to economists globally.

*The L-shape recession is one that goes down and then stays there for a long period of time without a recovery. It could last for 20 years like it happened in Japan.
*A V-shape recession goes down pretty fast and recovers in very less time.
*A U-shape recession goes down slowly and then stays there for a few years before recovering slowly. It's length could be anywhere from 2-10 years, like in the 1970s in US where it lasted for 8 years.

Most of the times, it is the economic policy adopted by a government before recession, which determines what type of recession it is. Wrongly calibrated economic policies lead to L-shape recessions, which the worst of the lot.


2) Stress Testing
It refers to a simulation technique used on asset and liability portfolios to determine their reactions to different financial situations. Stress tests are also used to gauge the effects of certain stressors on a company or industry. They are usually computer-generated simulation models that test hypothetical scenarios.

It is a useful method for determining how a portfolio will fare during a period of financial crisis. One of the most widely used methods of stress testing, is the Monte Carlo simulation.

The strength of financial institutions can be also evaluated using a stress test.
An example would be, the Treasury Department running stress tests on banks to determine their financial condition. Banks often run these tests on themselves. Interest rates, lending requirements or unemployment could be among the changing factors.


3) Plain Vanilla
Refers to the standard or basic version of a financial instrument, usually options, bonds, futures and swaps. Plain vanilla is the opposite of an exotic instrument, which alters the components of a traditional financial instrument, which results in a more complex security.
E.g. a plain vanilla option would be the standard type of option, one with a simple expiration date and strike price and no additional features.

Source: News articles, Websites, Investopedia