Assignment

Assignment -06 1. Equity contracts are claims to a share in the profits and assets of a business. A particular type of incorrupt hazard that results from equity contracts is the principal-agent problem. Principals are all the stockholders. They consume the mass of a firms equity. Agents are the managers that only own a small percentage of the firm. The moral hazard occurs when agents wear outt try to maximize profits because they only stupefy a fraction of what the principals receive for the profits. 2. The free-rider problem occurs because peck who do not spend resources on collecting information so-and-so still take advantage of the information that opposite people have collected. The free-rider problem is particularly important in securities markets. If well-nigh investors acquire information that tells them which securities are undervalued and then buy these securities, former(a) investors who have not paid fir this information may be able to buy right along with the reasoning(a) investors. 3. After $50 million has been withdrawn from deposits and reserves, the avow has a problem: It has a reserve requirement of 10% of $cl million which is $15 million, but it has no reserves. To eliminate this shortfall, the till manager has four options.

One is to acquire reserves to dally a deposit safety valve by acceptation them from other banks in the federal fund market or borrowing from corporations. A second alternative is for the bank to sell nigh of its securities to help cover the deposit outflow. A third mode that the bank can play off a deposit outflow is to acquire reserves by borrowing from the Fed. Finally, a bank can acquire the $15 million of reserves to meet the deposit outflow by reducing its loan by this amount and depositing the $15 million it then receives with the Fed, thereby change magnitude its reserves by $15 million. 4. Before a financial instrument is bought or sold, there is the problem of adverse selection. What happens is that rack up candidates are more likely to be... If you want to get a full essay, order it on our website: Orderessay

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