The opportunity cost in determining the relationship between velocity and interest rate.

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Answer 1

Question

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Students have asked these similar questions

5. Some people find options expensive and use more complex structures to reduce the cost. For example, consider buying a call with a strike of $55 and selling a call with a strike of $60. a. What is the cost of establishing this combined position? b. What is the payoff of the combined position if the market price goes to $60? c. What is the payoff of the combined position if the market price goes to $100?

3. An investor has $1,000 to invest. They believe the price of the underlier will increase to $60 within one year. a. How many shares of stock could they buy with the $1,000 at the current price of $50, and how much would they make if the share price increased to $60? b. How many calls with a strike of $55 could they buy for the same $1,000, and how much would they make if the share price increased to $60? c. How much would they make (or lose) from the stock and from the calls if the share price declined to $40? 4. What is the premium on a call with a strike of $0.01? Why is the premium so close to the $50 share price?

1. We want to examine the comparative statics of the Black Scholes model. Complete the following table using the Excel model from class or another of your choice. Provide the call premium and the put premium for each scenario. Underlier Risk-free Scenario price rate Volatility Time to expiration Strike Call premium Put premium Baseline $50 5% 25% 1 year $55 Higher strike $50 5% 25% 1 year $60 Higher volatility $50 5% 40% 1 year $55 Higher risk free $50 8% 25% 1 year $55 More time $50 5% 25% 2 years $55 2. Look at the baseline scenario. a. What is the probability that the call is exercised in the baseline scenario? b. What is the probability that the put is exercised? c. Explain why the probabilities sum to 1.

Answer 2

Question

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Answer 3

Question

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Answer 4

Question

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

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Answer 5

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

Answer 6

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.

Economics Concept Introduction

Opportunity cost: Opportunity cost refers to the value of foregone goods and services to get other goods and services.

Answer 7

Chapter 32, Problem 1DQ

To determine

The opportunity cost in determining the relationship between velocity and interest rate.

Answer 8

Expert Solution & Answer

Explanation of Solution

The opportunity cost for holding the amount of money is the interest rate. As the interest rate increases, the opportunity cost of holding money will increase. This implies that people are discouraged to hold money to reduce the opportunity cost and people demand lower quantity of money. Because when he holds the money, he loses the interest that could have been earned. If the interest rate is lower, the opportunity cost of holding money increases and demands more quantity of money. This will increase the velocity or the circulation of money in the economy.