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Understanding Options, Monetary Policy, and Economic Concepts - Key Terms and Discussions

In today's session, we'll quiz and collect Homework #1 while exploring various critical economic concepts. We'll delve into options, discussing writing options and the zero-sum game of the options market. Key topics will include open market operations, FOMC, policy lags, and the current Fed behavior. Additionally, we'll review terms like reserve requirements, money supply, interest rates, and the dynamics of fiscal and monetary policy. Don't miss our discussion on Greenspan's legacy and the importance of productivity in the new economy!

jessenia-kianoush
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Understanding Options, Monetary Policy, and Economic Concepts - Key Terms and Discussions

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Presentation Transcript

  1. 1/25/06

  2. Today • Take quiz and collect HW #1 • Do the Google option example that is posted. • New posting, a HW assignment from last semester – give it your best try – we will do on Friday • More on options – writing options (naked vs covered) • What is meant by a zero sum game? Proving that the option market is a zero sum game! • Changing gears – wrap up some terms – the new economy – the cruise ship example re-visited. • Another new posting – Greenspan’s legacy article – a must read!

  3. Go over the Google example and draw a profit loss function associated with specific calls and specific puts (note, we assume away transactions costs)

  4. Discuss the idea of writing options – prove that the options market is a zero sum game

  5. On to the new economy! Some terms – draw cruise ship example again!

  6. Key terms/topics • OMO (open market operations) • FOMC (Federal Open Market Committee) • Beige Book • Policy Lags and forward looking behavior (two analogies – cruise ship ; driving a car) • Review of current state of affairs regarding actual fed behavior and the signals they are sending (Go Open Market Page)

  7. Key terms/topics (cont’d) • Board of Governors • The 12 Regional banks • Reserve Market (A Y2K example) • Reserves: Two types: 1) excess and required • Reserve Requirement Ratio • The Money Supply • The Federal Funds Rate • The Discount Rate • Interest rates: Short Term vs Long Term: Real vs Nominal • How monetary policy works!

  8. Key terms/topics (cont’d) • Fiscal policy • Monetary policy • NAIRU • Full employment • Potential growth rate of economy

  9. Key terms/topics (cont’d) • The Fed’s loss function • Exogenous shocks • Hawks vs doves • Overheating • The new economy • The Importance of Productivity • Speed limit of the economy • Traditional model

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