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1

Module 10A: Organizations (financial Risk) and government (poverty) learning objectives

Define DERIVATIVES and financial risk
Explain how derivatives can generate risk and reward
Describe the problem with regulation derivatives

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DERIVATIVES***important***

A derivative is a financial product
-A derivative is a contract between two or more parties whose value is based on an agreed- upon underlying financial asset, index or security.
Common underlying instruments include: bonds, currencies, etc

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Futures Contract

Contract between two or more parties where there is an agreed upon price for a transaction in the future.
-I will buy 100 barrels of oil from u for 5 dollars each in one year

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Financial Risk

Risks that are generated by financial transactions

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How are derivatives used

-Derivatives can be used a a hedge:
-I am an airline and I will use 10 million barrels of fuel a year. Enter future contract to purchase the fuel at a specified price in a specific time. I have hedged my exposure to fuel price risk

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How can derivatives be used to speculate

They can be used to speculate: (create risk)
-I think that the S&P index is going to go down, how can I make many\ey on that
-I can enter a derivative contract where I "sell" the index at todays prices
-Then buy low

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Many of these transactions re?

Unregulated

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Why use derivatives

Legitimate hedging function- They are a risk management tool
-Amplify (leverage) returns (both good and bad)
-All about risk/reward
-Help make money mov faster
-Help make money work harder

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What is the exposure in derivatives

NO ONE KNOWS HO WBUG IT IS
-QUADDRILLIONS

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How they should regulate

-If u want to speculate, shouldn't you be allowed
-Speculators often help markets work
- Can't regulate them

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Module 10B

Explain the cause of poverty
Describe the relationship between poverty and economics
Explain the roles of developed and less developed governments in addressing poverty

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Outline 10B

-World Poverty and Economics
-Causes of poverty and requisites of Economic growth
-Can governments help

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Poverty

Causes death
-Poor people die more often than risk. Same heath stats

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Our Insatiable Wants

-Our wants and desires spur economic activity
*Needs: food, water, shelter, and clothing
*Wants: entertainment, communication, variety, brownies, unlimited ?

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Our limited Means

-Resources are scares
-Technology
-Labor and Capital

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Labor

Labor- how do we produce stuff, mental and physical contributions humans contribute in the production process

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Capital

Capital-is all the nonhuman ingredients that go into production

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Technology

Technology- The act of Labor and Capital being combined together to produce stuff

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GDP

Measure our ability to produce stuff
-Primary measure of production
-Total value of production using market prices
-Doesn't take into account ownership (Camry plant in Detroit)
-GDP as the economic pie
-Doesn't tell us what is produced

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Productions Possibilities

Every economy has a stock of resources (labor and capital) and technology to produce
-How they combine these things is virtually limitless
-If only two products, this could be represented on the PPC
-Food vs education

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Real GDP

Adjust for inflation of prices
- are we producing more

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Per Capita real GDP

Adjust of inflation and divisible by every person.

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Lesser Developed countries
What causes poverty

-Quality of labor force (lack of education?)
-Stock of Capital/ Capital accumulation
-Technology
-Efficiency
-Population

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*What does the gov do to help Less developed countries

Less Developed Countries
-Communism vs Capitalism
-Planned vs unplanned economy
-Involvement in education
-Infrastructure
-Attract FDI (Foreign direct investment

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What can developed countries do to help less developed countries

Developed countries
-Humanitarian aid
-World Bank/ loans
-Partnerships/ Cooperation
-Outsourcing