The Addition of the Liquidity Premium Theory to the Expectations

question 36

Multiple Choice

The addition of the liquidity premium theory to the expectations hypothesis allows us to explain why:

• A) yield curves usually slope upward.
• B) interest rates on bonds of different maturities move together.
• C) long-term interest rates are less volatile than short term interest rates.
• D) yield curves are flat.

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Definitions:

Hedge Strategy

Investment strategies intended to reduce potential losses that may be incurred from adverse price movements in assets.

Short Oil Futures

A speculative strategy involving the sale of oil futures contracts in anticipation of oil prices falling, intending to buy back at a lower price.

Long Steel Futures

Financial contracts to buy steel at a predetermined price at a specified time in the future, often used as a hedge against price fluctuations.

Shorting Index Futures

A strategy involving selling index futures contracts in anticipation of a decline in the index's value to profit from falling market prices.