Derivative Trades Essay

Derivative Trades Essay Derivative Trades Essay Futures trades Crude Oil (Brent) 04/08/2011 Why did you enter the trade (what were your expectations?) â€Å"Libya burns, Japan shakes, Nigeria's nervous, Portugal bails, Bahrain bubbles and now China troubles. Do you need any more reasons for oil to go higher?† (Flynn, 2011, para. 1). Having read an article that suggested increase in the price of oil, I decided to set up a bull calendar spread. How did you set up the trade and how did the execution proceed? I executed a market order to buy two contracts of IBK11 - Crude Oil (Brent) MAY 2011. As for the short leg of the spread, I set up a contingent order upon USO price. If the USO price drops below $44.5, the order to sell two Crude Oil (Brent) JUL 2011 contracts will be executed, resulting in bull calendar spread. On 4/11 USO dropped below $44.5, and as a result contingent order was executed. How did you manage the risk of the position? To lower the risk of the position I set up a bull spread, instead of taking a naked long futures position. Bull spread reduced the risk of a larger-than-expected loss in case the price of oil would decrease. In addition, calendar spread required much lower margin compared to the naked position. How and when did you exit your position? Were your expectations realized? My expectations were not realized as oil price plunged on 4/11. I decided to exit my positions via market order on 04/14/2011 by taking opposite positions in the same contracts. Contingent order to sell two JUL 2011 limited a loss to $1,726.32. Crude Oil 02/22/2011 Why did you enter

The Governments Role in the Economy

The Government's Role in the Economy In the narrowest sense, the governments involvement in the economy is to help correct market failures or situations in which private markets cannot maximize the value that they could create for society.  This includes providing public goods, internalizing externalities (consequences of economic activities on unrelated third parties), and enforcing competition.  That being said, many societies have accepted a broader involvement of government in a capitalist economy. While consumers and producers make most of the decisions that mold the economy, government activities have a powerful effect on the U.S. economy in several areas. Promoting Stabilization and Growth Perhaps most important, the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates (known as fiscal policy) or managing the money supply and controlling the use of credit (known as monetary policy), it can slow down or speed up the economys rate of growth and, in the process, affect the level of prices and employment. For many years following the Great Depression of the 1930s, recessions- periods of slow economic growth and high unemployment often defined as two consecutive quarters of decline in the gross domestic product, or GDP- were viewed as the greatest of economic threats. When the danger of recession appeared most serious, the government sought to strengthen the economy by spending heavily itself or by cutting taxes so that consumers would spend more, and by fostering rapid growth in the money supply, which also encouraged more spending. In the 1970s, major price increases, particularly for energy, created a strong fear of inflation, which is an increase in the overall level of prices. As a result, government leaders came to concentrate more on controlling inflation than on combating recession by limiting spending, resisting tax cuts, and reining in growth in the money supply. A New Plan for Stabilizing the Economy Ideas about the best tools for stabilizing the economy changed substantially between the 1960s and the 1990s. In the 1960s, the government had great faith in fiscal policy, or the manipulation of government revenues to influence the economy. Since spending and taxes are controlled by the president and the Congress, these elected officials played a leading role in directing the economy. A period of high inflation, high unemployment, and huge government deficits weakened confidence in fiscal policy as a tool for regulating the overall pace of economic activity. Instead, monetary policy- controlling the nations money supply through such devices as interest rates- assumed a growing involvement. Monetary policy is directed by the nations central bank, known as the Federal Reserve Board, which has considerable independence from the president and the Congress. The Fed was created in 1913 in the belief that centralized, regulated control of the nation’s monetary system would help alleviate or prevent financial crises such as the  Panic of 1907, which started with a failed attempt to corner the market on the stock of the United Copper Co. and triggered a run on bank withdrawals and the bankruptcy of financial institutions nationwide. Source Conte, Christopher and Albert Karr.  Outline of the U.S. Economy. Washington, D.C.: U.S. Dept. of State.