|English to Spanish translations [PRO]|
Bus/Financial - Finance (general)
|English term or phrase: agency problem|
|Agency problem: The worry that employees’ incentives will tempt them to make decisions|
for personal gain, even if that increases the risks faced by the firm.
If only that were so. Unfortunately it is not. The psychology and
incentives associated with running businesses at investment banks now
enter the picture. There is what is called an agency problem. For example,
Hank, a whizz-kid investment banker, trades a hot financial product,
such as equity index options. He can sell options into the market which
oblige his bank to pay out if the Dow Jones Industrial Average, or some
other index, falls above or below a certain level. According to the level
and the exercise price of the option, the bank is in danger of losing large
amounts of money. The longer the term of the option, the more dangerous
the position is.
Pushing the envelope
The upshot of the agency problem is that investment banks, egged on
by employees like Hank, have erred on the side of imprudence, especially
in the case of long-dated derivative products with a limited trading
history. Their mathematical models have been designed to guide
them in a competitive market and to help them sail as close to the
wind as possible.
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