Risk Preference ExercisesCompensation

1. Given what you know about risk preferences and what propels individuals to take risk evaluate, using what you know about the business model of each firm and from the perspective of the shareholder of the firm:

1. The use of trading limits by an investment banks proprietary trading desk. E.g., $2 mil in losses per trader per day and an aggregate limit of the trading desk = $40 mil per day. Evaluate the traders behavior in terms of risk taken and possibility for returns generated.

2. The effectiveness of a Deals Committee used by a private equity firm in which deal teams present the merits of the deals they want to close. The merits would include expected profitability and risk metrics.

3. An executive compensation plan in which the senior executives plan includes: $3 mil annual salary, fully vested pension and 100,000 warrants granted per year with a strike price of $75 (company shares are currently trading at $50).