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Tutor profile: Prudhvi C.

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Prudhvi C.
Senior Finance Major at University of Massachusetts Lowell
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Questions

Subject: Economics

TutorMe
Question:

Explain how one country offshoring specific jobs to another country can help the economies of both countries.

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Prudhvi C.
Answer:

When looking at jobs in general, we can categorize them into jobs that require high-skilled labor and low-skilled labor. Let's imagine we have two countries - one country that is highly economically developed (Country A) and another country that is still developing (Country B). Because Country A is highly developed, there aren't as many laborers that can provide low-skilled labor relative to the number of workers that can provide high-skilled labor and thus, low-skilled labor workers are relatively expensive. Country A can afford this, but its profits will be compressed and it cannot expand as quickly as it would like to. Conversely, Country B has an abundance of low-skilled laborers relative to high-skilled laborers and they are willing to work for less money because there are many of them. If Country A were to export specific tasks to Country B, Country A would be saving money by hiring more affordable workers and can reinvest this saved money back into its business or into other cost-saving measures for its consumers. Similarly, Country B will not experience a decrease in its unemployment rates as more and more low-skilled laborers are being hired to perform tasks for overseas companies.

Subject: Finance

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Question:

If you expect a stock to move up, how can you purchase the stock and hedge your position using options?

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Prudhvi C.
Answer:

When talking about options, it's important to note that there are two different types of options - calls and puts. When you purchase a call option, you are buying the "right" (not the obligation) to purchase 'x' amount of stock at 'x' price (known as the strike price) on or before 'x' date (known as the expiration date). All variables are pre-determined on the call contract when you buy it. A call option is used when you believe the stock price will move up in the future, and you want to lock in a specific price at which you can buy stock. For instance, if Microsoft is trading at $130 today, but you believe the stock will be trading at $150 next month, you can buy a $140 Call Option on Microsoft that expires later next month. Once Microsoft stock (underlying) crosses above $140, the contract is considered to be "in the money" and can be exercised. If you bought 1 contract for 100 shares at a strike price of $140, you'll be paying $14,000 for 100 shares of Microsoft and, if the underlying is is above the strike price which was $140, you'll have gotten shares cheaper than the current market price. Alternatively, a put option differs to a call option in that money is made when the stock price goes below the strike price. In the same Microsoft example above, if the current market price is $130 but you expect the stock to go to $100 by the end of next month, you can buy a $120 put option that expires two months out from today. Now that we know what option contracts are, let's see how we can use them to hedge or "protect" ourselves from any downside risk. We know that if we purchase stock and open a long position we lose money when the stock price falls. Well, to offset any losses we might incur from the stock price moving down, we need to have something in our portfolio that will increase in value as the stock price goes down. As previously mentioned, a put contract gains value as the underlying price moves down towards the put strike price. If we believe Microsoft is going to go up, but want to protect ourself from downside risk, we can purchase 100 shares of Microsoft and also purchase 1 put contract below the current market price of Microsoft. Though we won't be making as many profits if the stock moves up as we would have without the put contract, we also won't be losing as much as we would have without the put.

Subject: Macroeconomics

TutorMe
Question:

What is the relationship between GDP, Inflation and Unemployment Rates, and why is it so important?

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Prudhvi C.
Answer:

Gross Domestic Product, or GDP, is one of the measures that is used to gauge economic activity and strength within a particular economy. Our goal as a nation is to not only increase GDP, but also ensure that the manner in which it is increasing is sustainable. When GDP begins to grow, it can often be a result of greater consumption, meaning people are buying more and more goods. This increase in demand can cause the general price level to rise, and we call this price-level increase "inflation". Because inflation is a result of increased expenditure, it can be a healthy sign. However, too much inflation is not good and is not sustainable, so the Federal Open Market Committee (FOMC) will keep a close eye on inflation expectations in order to increase or decrease interest rates as needed. When interest rates are raised, it makes it harder for companies and people to borrow money. This slows down the rate at which the economy is accelerating and helps ensure we maintain a steady pace in the growth of our economy. A rise in interest rates means companies cannot borrow as much money or as easily as they could have to finance expansion operations (which can include hiring programs). Also, consumers cannot borrow as much money or as easy to purchase houses or cars. This slowdown in consumption will mean companies will either stop hiring as aggressively as they once were or even lay-off some of their current workers. This results in an increase in the unemployment rate, and this is a figure that is desired to be low for a nation. The Federal Reserve is thus tasked with ensuring inflation is maintained at a steady level by while minimizing the unemployment rate.

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