FINANCE QUESTIONS I am posting it beause the answers are not complete pls make it correct

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The open market operation in the Federal Reserve

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Q. 1.

The effects of open market operation using T-accounts

Through the open market the Federal Reserve is able to influence the market by affecting the expectation of the participants in the market and changing the supply of money. The open market operation mainly entails the sales of reserves securities or the purchase that represents a considerable amount of trading in the market. The purchase of dollars from the public has the impact on the financial markets such as U.S dollar exchange rates, Treasury bond, Eurodollar and Treasury bill. Therefore, the main purpose of this essay is to address the impact of open market of the Federal Reserve on the fiscal markets.

The open market operation is the key tool used by the central bank or Federal Reserve to implement the monetary policies that enable the sales and purchase of securities. Therefore this tool plays a major role in the supply of funds and maintaining the Federal Reserve’s rate which is the main objective of the committee established by the Federal Open Market. However, the security that is certified to be sold or purchased and supplied by the Federal Reserve is limited by the authority that conducts the Open Market Operation.

Q. 2.

The Current Federal Funds Rate

Federal funds rate is the interest rate used by the depository institution to lend moneys overnight to other bank institution as per the Federal Reserve regulations. Federal funds rate which is the most persuasive interest rates is only usable to the creditworthy institutions depending on their transactions overnight. The interest rate that is paid by the borrowing bank is negotiated by the two banks and the weighted average is determined bearing in mind the Federal

Reserve’s effective rates. In addition, the target rate of the federal is determined after a lengthy discussion with the Federal Open Market group members.

Open market is used to ensure effectiveness in the federal funds rate and influence the money supply in the economy of most countries like U.S. The weighted average of federal reserves is mostly calculated after closing the transactions of the previous day. However, according to the current statistics the federal rates have been influenced or affected by the groups of brokers. Therefore the rates fluctuate depending on the high and low rates transacted by the ICAP’s brokers.

As per the Federal reserves, discount rates is the charged interest rate directed to the depository institutions like the commercial banks depending on the loan received and the lending facility used. Three discount programs are being offered by the Federal funds banks to bank institution namely: seasonal credit, secondary credit and primary credit. The short-terms rates of the federal have declined since 2003 due to the high volatility that affected the fund rates. From the analysis of the key factors that influence the rates, some of the forces that caused the fall of volatility were due to the earlier increases of the rates. The fall in volatility in the recent years has affected the participants in the market and hence affecting the business in the banking institutions.

Q. 3.

Federal Open Market Committee

The committee of the Federal Reserve meets frequently to assess the economy of the financial institution and discuss the actions to be taken for the central bank and other banking institutions to grow. This process takes place eight times in a year after a period of seven weeks. Further the members of the federal may have additional meetings for the purpose of implementing and amending the target rate. From the minutes and actions taken by the Federal Reserve, it is clear that the system was designed to regulate the financial institutions to ensure consumers get fair services in business system and receive sufficient information.

Q. 4.

Entities That Control Discount Rate

Some of the entities that contribute to the control of the discount rate in the Federal Reserve’s include: agencies of the foreign banks, credit unions, saving and loan association, commercial bank, savings bank and other domestic banking entities. The changes that are made by these entities reflect the movement and achievement attained by the Federal Reserve.

For depository institutions to comply with the Federal Reserve, they must satisfy some requirements set by the federal to ensure smooth running of financial institutions. The requirements that are imposed in all the financial institutions including savings banks, commercial bank, credit unions and savings and loan associations. The financial institutions holds vault cash is sufficient way as a way of meeting the requirements set by the Federal Reserve. In addition, the requirement of the Reserve balance that demands the balance need to be realized on average and maintained periodically is a good structure that ensures flexibility and good management in the Federal Reserve. On the other hand, open market operation has been the basic tool and flexible means of realizing the objective of the monetary policy.

Q. 5.

The Structure and Independence of The Federal Reserve System

Accountability, independence, transparency among other responsibility was the concepts that were considered during the evolution and structuring of the central bank. Both the Federal Reserve and the European Central Bank play a significant role in central bank and other baking institutions. Basically the two institutions have decentralized structure, use same monetary tools and are independent in carrying out their activities and duties.

In the context of organization and the responsibility of supervising the banking sector, the two institutions differ. This is because European Central Bank plays an important role in the monetary interactions and economy globally. It also belongs to the world leading economic area and has largest shares in GDP worldwide. In addition ECB covers 15 countries compared to Federal Reserve that has only 12 districts. It is therefore clear that despite the similarity between the two institutions, there are some differences between Fed and ECB.

WORK CITED

Bodie, Zvi, and Robert C. Merton. Finance. Upper Saddle River, NJ: Prentice Hall, 2000. Print.

Prochnow, Herbert V. The Federal Reserve System. New York: Harper, 1960. Print.

The Federal Reserve System: Purposes and Functions. Washington, D.C: Board of Governors, 1974. Print.