Hot Money

See Also:
Effective Rate of Interest Calculation
Fixed Interest Rate vs Floating Interest Rate
Interest Rate
Nominal Interest Rate
Term Deposit

Hot Money Definition

Hot money refers to the cash that investors from foreign countries will invest during the short term in search of the highest interest rate possible. Normally, you do this through term deposits or certificates of deposit (CDs).

Hot Money Meaning

Hot money flows usually occur when one country can provide a higher interest rate than the one where the investor currently lives or conducts business. Often times these investors will invest in short term deposits like CDs. Then they will jump the funds from bank to bank if they can obtain a higher interest rate. Sometimes they will even do this if there is a penalty involved in withdrawing the funds like in a CD. This would only occur if the interest rate at another institution were dramatically higher to cover the cost of withdrawing the funds.

Hot Money Example

Kawahonda is a hot money investor from Japan and is looking to aggressively invest $100,000 he currently has sitting in a savings account in Japan earning 1%. He begins looking in the United States, and finds that he can earn 5% in short term CDs. He immediately contacts a bank in the United States and deposits the $100,000 in a 3 month CD. There is a 1% penalty if Kawahonda were to withdraw his funds early. After a month invested in the CD Kawahonda finds another bank in the U.S. that offers a CD that pays 8%. Kawahonda immediately withdraws the $100,000 and invest the money in a 6 month CD. at the end of the six month period Kawahonda will have earned:
$100,000 +($100,000 * 1/12 *.05) = $100,417 = amount earned in original CD
$100,417 – ($100,000 *.01) = $99,417 = amount after penalty is assessed
99,417 + ($99,417 * 6/12 * .08) = 103,394 = amount earned in 8% CD
Note: By investing in the higher interest paying CD Kawahonda is able to make $2,144($103,394 – $101,250) more even with the penalty. It is also $2,894 ($103,394 – $100,500) more than if Kawahonda kept is money in his savings account domestically.
hot money

Related Blogs
Does your Accounting Department Produce Net Income?

Coaching the Entrepreneur: Learn how to know what you don’t know. How much should I spend on accounting for my company?     I have been in the accounting profession for 32 years, and for the last 6 years, I’ve owned my own consulting firm to assist companies with accounting challenges. There is one common theme that I

Read More »
Near Sourcing vs. Outsourcing: The Key to Cost-Effective Accounting Solutions

In this insightful interview, Dan sheds light on the critical role of accounting in business growth and success. Uncover the common pitfalls business owners face when overlooking accounting and how it can hinder access to loans and financial opportunities. Learn why good financial statements are vital for decision-making and attracting investors. With the NearSourcing model,

Read More »
Is Mexico the New China?

In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing. Nearshoring, the process of relocating operations closer to home, has emerged as an explosive opportunity for American and Mexican companies to collaborate like never before.

Read More »
WIKI CFO® - Browse hundreds of articles
Skip to content