Laila, an Egyptian Broker, Is Currently Trying to Maximize Her

question 110

Essay

Laila, an Egyptian broker, is currently trying to maximize her profit in the bond market. Four bonds are available for purchase and sale at the bid and ask prices shown in the table below: Laila can buy up to 1000 units of each bond at the ask price or sell up to 1000 units of each bond at the bid price. During each of the next 3 years, the person who sells a bond will pay the owner of the bond the cash payments shown in the table below: Laila's goal is to maximize her revenue from selling bonds less her payment for buying bonds, subject to the constraint that after each year's payments are received, her current cash position (due only to cash payments from bonds and not purchases or sales of bonds) is nonnegative. Note that her current cash position can depend on past coupons and that cash accumulated at the end of each year earns 13% annual interest. Determine how to maximize net profit from buying and selling bonds, subject to the constraints previously described. Why do you think we limit the number of units of each bond that can be bought or sold?

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Definitions:

S-R Association

Stands for Stimulus-Response Association, which refers to the connection formed between a specific stimulus and a consequent response in behaviorism.

Guthrie

Edwin Ray Guthrie was a behavioral psychologist known for his theory that learning is a direct association between stimulus and response, occurring in a single trial without reinforcement.

Reward Reduction

A decrease in the magnitude or frequency of a rewarding stimulus following a behavior, which can affect the future likelihood of that behavior.

Environmental Stimuli

External factors or changes in the environment that can influence an individual's behavior or physiological responses.