3. (Mishkin 13.17) How do hedge funds differ from mutual funds? 4. (Mishkin 17.)

Question

3. (Mishkin 13.17) How do hedge funds differ from mutual funds? 4. (Mishkin 17.) Classify each of these transactions as an asset, a liability, or neither for each of the "players" in the money supply process-the federal reserve, banks, and depositors. a. b. c. d. e. You get a $10,000 loan from the bank to buy an automobile. You deposit $400 into your checking account at the local bank. The Fed provides an emergency loan to a bank for $1,000,000. A bank borrows $500,000 in overnight loans from another bank. You use your debit card to purchase a meal at a restaurant for $100.

Explanation / Answer

03) Hedge Funds are able to take speculative positions in derivative securities such as options and have the ability to short sell stocks which makes them quite risky. While Mutual funds on the other hand only invest in securities such as stocks, bond, money market instruments and other assets.

It's possible for the hedge fund manager to make money when the market is falling, but in case of mutual fund it is not permitted to take these highly risky positions and are typically safer as a result.

Another key difference between these two types of funds is their availability. Hedge funds are only available to a specific group of sophisticated investors with high net worth. The U.S. government deems them as "accredited investors", and the criteria for becoming one are lengthy and restrictive. This isn't the case for mutual funds, which are very easy to purchase with minimal amounts of money.

4) For Banks:

a. Asset

b. Liability

c. Liability

d. Asset of the bank which lends and liability for the bank whih borrows.

e.Liability

For Federal Reserve:

a. Neither

b. Neither

c. Asset

d. Neither

e. Neither

For Depositors:

a. Liability

b. Asset

c. Neither

d. Neither

e. Liability

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