Investments, 11th Edition (exclude Access Card)
11th Edition
ISBN: 9781260201543
Author: Zvi Bodie Professor; Alex Kane; Alan J. Marcus Professor
Publisher: McGraw-Hill Education
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Chapter 1, Problem 18PS
Summary Introduction
To Determine: Wall Street firms traditionally compensated their traders with a share of the trading profits that they generated. Explain the practice might have affected trader’s willingness to assume risk. Determine the agency problem this practice engendered.
Introduction: When traders are compensated with profit it means that their work is appreciated, and they are motivated to reach further targets.
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Chapter 1 Solutions
Investments, 11th Edition (exclude Access Card)
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- How does the increasing prevalence of high- frequency trading (HFT) systems employed by Goldman Sachs impact market efficiency and information asymmetry in global financial markets, particularly considering their advanced artificial intelligence and machine learning capabilities? Examine the implications for traditional fundamental analysts and retail investors who may not have access to similar technological capabilities, and consider how this technological divide might affect price discovery processes, market liquidity, and overall market stability. Furthermore, analyze the regulatory challenges this creates for financial authorities trying to ensure fair market access and prevent potential market manipulation while fostering innovation in financial technology.arrow_forwardmarket mispricing creates arbitrage opportunities, is this true and how. the actions of arbitrageurs contributes towards the removal of mispricing, is this true and how.arrow_forwardWhy do companies with small profit margins have a smaller motivation to hedge against currency movements? Which industries (both specifically and the market form) are these to be most likely to be found it?arrow_forward
- i)discuss accounting issues in risk management, and explain the following terms: fair value hedge, cash flow hedge, foreign investment hedge, speculation ii)discuss some of the famous cases in which the lack of proper risk management policies and procedures have caused companies to incur large losses. iii)explain some general guidelines that senior management should follow to set up and maintain an effective risk management system. iv)explain how a currency swap can be used to hedge a stream of foreign cash flows. v)define interest rate derivatives, and compare and contrast them against bond derivatives.arrow_forwardIf markets are truly efficient, does it matter whether firms engage in earnings management? On the other hand, if firms manage earnings, what does that say about management’s view on efficient markets?arrow_forwardThe "Discipline of the Market" means that in a competitive market customers and investors deal with firms that behave well, and leave those that do not. They avoid too much risk and flock to firms that pay the best. Then the good actors succeed, and the bad actors go out of business naturally. If the Discipline of the Market apply to financial services, then why do we need regulation and why do we need government restrictions where the free market should apply?arrow_forward
- Which of the following arguments supports the view that regulation is not necessary, particularly to the extent that it currently exists? Select one: a. Markets for information are not efficient and therefore produce a sub-optimum amount of information, given the problem of 'free riders'. b. Accounting information is like any other good, and people will be prepared to pay for it to the extent that it has a use. c. Investors need protection from fraudulent organisations that may produce misleading information. d. Information asymmetry exists because not everyone has the same power over resources to obtain the information they need.arrow_forwardWhich of the following statements is INCORRECT ? Large investment banks finance most of their activities by using retail consumer deposits as the primary source of funds. Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in the firms exposes investors to agency costs. As a delegated monitor, a financial institution's actions reduce agency costs. Financial institutions provide economies of scale in transaction costsarrow_forwardWhat were the direct and indirect costs of the LIBOR scandal for Barclays? Are these costs only a part of the reality for investment banks and a necessary risk to produce the profits required by their shareholders ?arrow_forward
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