Define the discount rate. Tell who can raise the discount
rate. Explain how raising the discount rate leads to a reduction in the money
In banking the discount rate refers to
the interest rate charged to commercial banks and some other depository
institutions for loans received from Federal Reserve Bank discount window. In
finance the discount rate refers to interest rate used in discounted cash flow
analysis to determine the present value or future cash flow.The discount rate
can be raised by the Federal Reserve Bank.
The Federal Reserve affect the money
supply via the discount rate as the amount of lending that goes on in the
economy will change accordingly. Discount rate affects the commercial interest
rates and therefore has an impact on the loans issuance and money supply.
PLEASE ANSWER THIS ADDITIONALY What
happens when discount rate is raised?
Describe a stock market bubble. Explain what causes a
bubble, and why a crash generally follows a bubble.
Stock market bubble is a sort of
economic bubble in stock markets occurring when market participants drive stock
prices above their value according to a particular stock valuation.
A stock bubble is caused by an economic
cycle, with a rapid expansion occurring and followed by a contraction. The
crash is generally followed by a bubble since the investors are too eager to
sell off and at some point the prices are not justified by the value.
Describe what it means for one currency to be rising against
another currency. Explain how Europeans vacationing in the United States
benefit when the euro is rising against the dollar.
When one currency is raising against
another it means there is an increase of value in one currency against another.
The currencies change the value for reasons such as capital inflows, and the
state of a country’s
account at the given moment.
When euro is rising against the dollar
it means that when one exchanges the money you would get more dollars per euro.
That situation is particularly beneficial for tourists coming from Europe to
What is buying on margin? Use an example to demonstrate how
buying on margin enables currency traders to make large profits on small
Buying on margin means purchasing an
asset with a down payment and financing the balance through a loan by using the
asset as the collateral.
Example: Suppose you buy a house at a
purchase price of $100,000 and you put 10 percent down, your equity (what you
own) is $10,000 and the remaining $90,000 with a mortgage is borrowed. Suppose
the value of the house rises to $120,000 and you sell the profit here will be
of 100 percent (excluding closing costs). So,the $20,000 gain on the property
represents a gain of 20 percent on the purchase price of $100,000, however
since your real investment represents the sum of $10,000 (the down payment),
your attain is of 200 percent (a gain of $20,000 on the initial investment of
What are futures contracts and forward contracts? Describe
two differences between them.
Forward contract is a private
transaction, it has credit risk and it is unregulated. It is an
informal agreement traded through a broker-dealer network to buy and sell
specified assets, typically currency, at a specified price at a certain future
Futures contracts takes place on an
organized exchanged where all of the contracts terms and conditions except
price are formalized. Its standardalization helps to create liquidity in
marketplace. It is an agreement to buy or sell assets, especially
commodities or shares, at a fixed price but to be delivered and paid for later.
Main differences between the two are:
Future contracts are regulated by the federal government and forward are not;
Future have no credit risk, but forwards do; Forwards are customized to client’s needs, but future are organized
except the price.