Bucket

AAA

DEFINITION of 'Bucket'

1. A group of swaps with similar or identical maturities.

2. Any group of securities with a similar level of risk. An investment strategy called the "bucket approach," developed by Nobel Memorial Prize winner James Tobin, recommends dividing investments into high-risk and low-risk "buckets" and then trying to achieve the highest possible return for each bucket.

INVESTOPEDIA EXPLAINS 'Bucket'

1. Buckets can be used to assess the sensitivity of a portfolio of swaps to changes in interest rates. Once risk (called "bucket exposure") has been determined (through a process called "bucket analysis"), the investor may choose to hedge that risk if it is cost-effective to do so. A strategy called immunization can be used to create a perfect hedge against all bucket exposures.

2. Tobin's strategy called for alloting stocks between a "risky bucket" and a "safe bucket". However, other proponents of the bucket strategy use up to five buckets in their variation of this approach.

RELATED TERMS
  1. James Tobin

    An American economist who won the Nobel Memorial Prize in Economics ...
  2. Reverse Swap

    An exchange of cash flow streams that undoes the effects of an ...
  3. Debt For Bond Swap

    A debt swap involving the exchange of a new bond issue for similar ...
  4. Interest Rate Swap

    An agreement between two parties (known as counterparties) where ...
  5. Total Return Swap

    A swap agreement in which one party makes payments based on a ...
  6. Quanto Swap

    A swap with varying combinations of interest rate, currency and ...
RELATED FAQS
  1. Did the repeal of the Glass-Steagall Act contribute to the 2008 financial crisis?

    The repeal of the Glass-Steagall Act was a minor contributor to the financial crisis, if it contributed to the crisis at ... Read Full Answer >>
  2. How can the problem of asymmetric information be overcome?

    Asymmetric information is inherent in most, if not all, markets. To take a basic example, a patient admitted to a hospital ... Read Full Answer >>
  3. How were the figures 80 and 20 arrived at in the 80-20 rule (Pareto Principle)?

    The 80-20 rule has its roots in early 20th century Italy. Economist Vilfredo Pareto – best known for the concepts of Pareto ... Read Full Answer >>
  4. What is a geometric mean in statistics?

    In statistics there exists a wide variety of metrics such as median, standard deviation, arithmetic mean, power mean, geometric ... Read Full Answer >>
  5. What are some real-life examples of the economies of scope?

    Real-world examples of economies of scope can be seen in mergers and acquisitions (M&A), newly discovered uses of resource ... Read Full Answer >>
  6. How reliable or accurate is marginal analysis?

    Marginal analysis is designed to show how economic reasoning allows actors to accomplish more by understanding limits on ... Read Full Answer >>
Related Articles
  1. Retirement

    A Sanity-Saving Retirement Stock Portfolio

    The market rollercoaster has many retirees calling it quits on stocks. Big mistake.
  2. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  3. Bonds & Fixed Income

    A Guide To Real Estate Derivatives

    These instruments provide exposure to the real estate market without having to buy and sell property.
  4. Bonds & Fixed Income

    Credit Default Swaps: An Introduction

    This derivative can help manage portfolio risk, but it isn't a simple vehicle.
  5. Options & Futures

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  6. Options & Futures

    An Introduction To Swaps

    Learn how these derivatives work and how companies can benefit from them.
  7. Active Trading

    How Companies Use Derivatives To Hedge Risk

    Derivatives can reduce the risks associated with changes in foreign exchange rates, interest rates and commodity prices.
  8. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.
  9. Economics

    Explaining the Value Chain

    A model of how businesses receive raw materials as input, add value to the raw materials, and sell finished products to customers.
  10. Fundamental Analysis

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.

You May Also Like

Hot Definitions
  1. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  2. Standard Error

    The standard deviation of the sampling distribution of a statistic. Standard error is a statistical term that measures the ...
  3. Capital Stock

    The common and preferred stock a company is authorized to issue, according to their corporate charter. Capital stock represents ...
  4. Unearned Revenue

    When an individual or company receives money for a service or product that has yet to be fulfilled. Unearned revenue can ...
  5. Trailing Twelve Months - TTM

    The timeframe of the past 12 months used for reporting financial figures. A company's trailing 12 months is a representation ...
Trading Center