The Federal Reserve is popular financial regulator that represents the Central bank of U.S. and has an effective control and influence over the economy of the country. This is done by imposing regulations to financial institutions such as commercial banks that operates in the market. The Federal Reserve also regulates the flow of money in the economy through different methods such as manipulation of the tax rates in the economy (Phillips, 2011). These methods help to control the inflation in the country.
In my opinion, the Federal Reserve System is critical instrument that the country should rely on regulating the money circulation in the economy. Before the system was put into operation, numerous currencies in the United States were authorized tender. During that time, the commercial banks were not substantially stable to receive the upcoming clients. At times, firms and individual were challenged in withdrawing their balances because most of the banks did not have sufficient liquidity. Different currencies in the economy hold different values which placed a problem of good trading among various firms.
Before 1914, there was no central bank in the United States. In the history of United States the first commercial bank was chartered followed by disbanded. Their chief objective was to provide depository and lending services to the United State government, did not perform like modern central bank. During this time especially in the 19th century, the United States had no authoritative monitory structure that would intervene in the financial market and offer funds to the commercial banks that were experiencing bank runs during that period. Consequently the nation was hit by interrupted bank alarms where runs were experienced in different banks concurrently and resulted to financial crisis in the country’s economy. Therefore, this indicates that, without monetary regulations in the country the financial market cannot be stable.
The Federal Reserve was developed with the primary objective to alleviate the flow of the currency and also to develop a programmed monetary system that could be of great help to all citizens in the country. As a result the Federal Reserve created a safe framework that every commercial bank could set down their dollar reserves and also retrieve them conveniently when the need rises. The central bank of Unites states offers currency elasticity meaning that it establishes an environment where the other banks are able to effectively transact. The commercial banks in this case, are able to lend out money to individuals and businesses and receive money inform of deposits at agreeable interest rates to the borrowers, depositors and lenders according to business and monetary needs.
There are various responsibilities and roles of federal reserves that provide duties that make the United State need the Federal Reserve System. The main aim of the Federal Reserve is to control the policies regarding money circulation in the economy by influencing the condition of the economy in the markets. This involves regulation of the credits issued in the economy through interest rates interventions. The other monetary policy includes regulation of the money supply in the country through purchasing and selling financial instruments such as government bonds.
The other role of the Federal Reserve is to monitor and regulate the establishment of different commercial banks in the economy. The Federal Reserve body sets the base interest rates to the commercial bank so as the banks cannot exploit or take advantage of their customers by raising the interest rates. The main objective of the commercial bank is to maximize profit. Therefore, if there are not monitored or regulated, they can increase interest rates to their favorable level that can yield more profit. Thus the Federal Reserve plays a vital role to protect the bank customers in the country.
The Federal Reserve has also played a significant role in maintaining the economic stability in the country. It ensures that the economy remains in a stale situation and also formulates policies to mitigate any uncertainties that may interfere with financial market stability. The financial transactions in the economy are thus exercised in a free environment where risks are minimal. The Federal Reserve is also important in offering services to the government and also contributes in the management of the payment system in the United States.
As discussed above, the central bank of United States holds various responsibilities in the country’s economic structure. Without the existence of the Federal Reserve the supervision to the central bank and other commercial banks could not be effective. An effective monetary structure cannot be effective without enhancing enough supervision in the different financial institutions in the economy. Unlike Forex trading, financial institutions have to monitored and regulated by a self-governing institution that is not under the influence of the commercial banks or the government but by the economy’s welfare.
How the characters in the movie made money by buying and selling "futures contracts" on the commodities market
The movie illustrates how the futures contracts are applied in the exchange market to regulate the profit earned from selling of oranges. The reliable orange crop is expected to increase in productivity for fresh oranges. As a result Frozen Concentrated Orange Juice (FCOJ) would decrease demand thus; the juice could be of little importance to the food producers. This would lead to decrease in the FCOJ’s price when the business men will gather this information.
However, the fraudulent report helped the Duke Brothers to predict that there would be less fresh oranges harvest. This in return would raise the demand for the FCOJ juice in the following year, consequently, rising the price. By taking advantage of this information the protagonists are influences to increase profit by the use of the futures market as discussed below.
Dissimilar to the convectional stocks, the futures contract provide an opportunity where the seller can sell them even at a time when they do not own the subject commodity. For instance, a contract to sell one thousand pounds of the FCOJ at a price of $1.50 per pound in the month of February indicated that obligation of the buyer to buy and the obligation of the seller to sell at a given time and price. The concept of the futures contract does not consider the way or the place where the seller obtains the commodity as long as the seller can be able to offer the commodity at that time and price. In some cases the sales might result into a loss to seller.
Valentine and Winthorpe initially trade the FCOJ futures at a price of $1.45 per pound which was a price exaggerated by the Duke Brothers. The brother’s buying behavior influenced other traders to thinks that the Dukes are attempting to corner the market, leading to a purchasing frenzy. After the real report on the crop indicted that the fresh oranges have had better harvest, Valentine and Winthorpe purchases future at a price of $0.22 per pound. Therefore, for every future they have purchased previously at a price of $1.45, they incurred a matching value of $0.22 resulting to profit of more than $1.20 per pound. This is an average profit of over 545%.
Although it is not clearly stipulated in the movie on how much they make as profit, if they had investment of $0.5 million, both Valentine and Winthorpe investment, they would have earned $2.7 million(Mark, 2010). This is as a result of Dukes brothers purchasing fake report from Coleman’s, Beeks and Ophelia’s savings. It substantially shows that they bought extra futures contract on made and margin dozens of more millions. This is because a smaller amount of money would not lead to bankruptcy of Dukes brothers.
During the same period, the Dukes purchased bounty quantity of FCOJ futures at much higher prices. This is because their prediction was incorrect as they expected that the crop report would increase the demand of the juice leading to higher prices. They have calculated amount of significant profit from this prediction. When it was realized that they have spread out the secret information about the crop report, their report was declared fraudulent and the correct and real repot was disclosed. The prices began to fall before they had a chance to trade off their futures contracts. They were forced to purchase numerous units of FCOJ juice at a price relatively higher than the selling price. As a result, they incurred loss that lead to their bankruptcy.
Kerk Phillips. Why does the U.S. have a Federal Reserve System anyway? For the Deseret News, Monday, Sept. 5 2011
“Open Market Operations". Federal Reserve.
http://www.federalreserve.gov/fomc/fundsrate.htm. Retrieved August 29, 2011.
Toma, Mark. "Federal Reserve System". EH. Net Encyclopedia. Economic History Association. Retrieved February 27, 2011. http://eh.net/encyclopedia/article/toma.reserve
Ebert, Roger. Trading Places, Chicago Sun-Times, June 9, 1983. Accessed April 12, 2010.
Monahan, Mark. Must-have movies: Trading Places (1983), The Daily Telegraph, May 20, 2005. Accessed April 13, 2010