HW1W09 - Problem Set 1 ECN 134 Finance Economics Prof...

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Problem Set 1 ECN 134 Finance Economics Prof. Farshid Mojaver Part A: Investment Environment 1. Suppose you discover a treasure check of $10 billion in cash. a. Is this a real or financial asset? b. Is society any richer for the discovery? c. Are you wealthier? d. Can you reconcile your answers to (b) and (c)? Is anyone worse off as a result of the discovery? 2. Financial engineering has been disparaged as nothing more than paper shuffling. Critics argue that resources used for rearranging wealth (that is, bundling and unbundling financial assets) might be better spent on creating wealth (that is, creating real assets). Evaluate this criticism. Are any benefits realized by creating an array of derivative securities from various primary securities? 3. Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and shareholders. a. A fixed salary. b. Stock in the firm. c. Call options on shares of the firm.
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HW1W09 - Problem Set 1 ECN 134 Finance Economics Prof...

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