A Bank Is Establishing a Fixed Income Trading Department

question 37

Multiple Choice

A bank is establishing a fixed income trading department.It is considering whether to hire a team of star traders or to invest a similar sum of money in developing a proprietary,automated trading system.The most valid reason for investing in the automated trading system in preference ot hiring star traders is:

• A)The proprietary trading system is likely to generate better returns since star traders are in a powerful position to negotiate pay packages which appropriate the major part of the profit they create.
• B)Advanced software is better than human intuition at identifying mispricing in financial markets.
• C)Star traders are difficult to manage and can easily become "rogue traders".
• D)It's difficult to motivate traders once they have earned their first few million.

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Definitions:

Long-Run Cost Curve

A graphical representation that shows the minimum cost at which different quantities of output can be produced in the long run, highlighting economies and diseconomies of scale.

Industry Supply Curve

A graphical representation showing the relationship between the price of a good and the total output supplied by all firms in the industry.

Production Function

A mathematical model that describes the relationship between the quantities of productive inputs used and the amount of output produced.

Competitive Industry

A market scenario where multiple firms produce similar products, leading to high levels of competition.