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Economists don t often make good traders, but having a basic understanding of economic trends can help make sense of the day-to-day happenings in the futures, bond, and stock markets. For instance, an economic report can cause bond prices to tumble, interest rates to shoot higher, and stock index futures to fall. When the moves are sudden and short-term in nature, they can cause volatility in the stock market to spike higher. However, long periods of stable or falling interest rates can keep volatility at bay and create a favorable environment for higher stock prices. This chapter explores the relationships between interest rates, bond prices, and stocks. An important factor to keep in mind is that when interest rates move higher, bond prices tumble. And when rates fall, bonds rally. In addition, sudden jumps in interest rates can cause money to shift out of stocks and into interest-bearing investments which can also make prices fall in the stock market. However, when interest rates are low, investors are more inclined to look for pro ts in the stock market, and that trend can help lift share prices over the long term. In sum, for those readers interested in trading stock index options, index futures, and even shares of large companies, this chapter is designed to help you by providing a short course in economic analysis.



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An amuse bouche (ah mews boosh) is a tiny appetizer or hors d oeuvre offered,compliments of the chef and usually in more expensive restaurants,to guests seated at their

The following iteration method can be used for a non-linear cost function: pi = 1, for i = 1, . . . , N. Initialize: Iterate until the deviations are sufficiently small: y=x. ($&q2,





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Table d h te (tobble dote) originally meant a fixed menu with no choices like a meal you would be served if you were invited to someone s home for dinner Banquet menus are familiar examples of this kind of menu The term has also come to mean a menu that offers a selection of complete meals at set prices In other words, a customer may choose from among several selections, each of which includes an entr e and side dishes plus other courses, such as appetizer, salad, and dessert Each full meal selection has a single package price Many restaurants use a combination of la carte and table d h te selections For example, a steak house may include salad, potato, vegetable,and beverage with the entr e choice, while additional dishes like appetizers and desserts may be offered at extra cost.

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or another, such as antitrust actions or the controls exercised by the Federal Reserve Board. We have even experienced regulation of wages and prices, rationing, and allocation of materials. But regulation is different from and independent of the level of government spending. Intervention of this type could continue and could even increase at times when the government s share of gross national product is reduced. On the other hand, government spending could expand without bringing in its wake any more intensive regulation of the bargaining process in the private sector. Admittedly, the taxing and spending policies of the government may redistribute income in favor of one group of citizens at the expense of another. Yet this is still different from a net reduction in the freedom of decisionmaking. The people losing out on this redistribution are indeed more limited in what they can do with their incomes, but this is offset by the gain that the bene ciaries of the arrangements may receive. Nor can a community that believes in freedom absolve itself from its responsibility for certain groups, such as the veterans, the aged, and the unemployables. It would be dif cult, in fact, to argue that the destitute have any real freedom at all. We must recognize, however, that this is a valid area of controversy. As long as government services are designed to bene t the community as a whole, we can nd little basis for believing that there is a loss of individual freedom when higher incomes are taxed more heavily than lower incomes. The rich as well as the poor can attend the public

Closely related to the table d h te menu is the prix xe (pree x),meaning xed price, menu On a pure prix fixe menu, only one price is givenEach guest may choose one selection from each course offered,and the total meal costs the single price indicated Often, on such menus, a few items featuring costly ingredients carry an extra charge,called a supplementThe supplement is usually indicated in parentheses after the listing It is best to limit the number of supplements as much as possibleToo many extra charges on a prix xe menu can leave customers frustrated and angry A special variety of the prix xe menu sometimes used in ne restaurants is the tasting menu,also known by its French name,menu d gustation A tasting menu (Figure 5.

The condition for convergence of the series in the denominator of Eq. (3.12)) which is also the condition for the ergodicity of the birth-death CTMC, is:

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