Principal Trading Arrangements: When Are Common Contracts Optimal?

2021 ◽  
Author(s):  
Markus Baldauf ◽  
Christoph Frei ◽  
Joshua Mollner
Keyword(s):  
Weighted Average ◽  
Principal Agent ◽  
Financial Contracting ◽  
Average Price ◽  
Market Prices ◽  
Principal Agent Problem ◽  
Financial Arrangements

Many financial arrangements reference market prices that are yet to be realized at the time of contracting and consequently susceptible to manipulation. Two of the most common such arrangements are as follows: (i) guaranteed volume-weighted average price (VWAP) contracts, which reference the VWAP prevailing over an execution window, and (ii) market-on-close contracts, which reference the price prevailing at the window’s end. To study such situations, we introduce a stylized model of financial contracting between a client, who wishes to trade a large position, and the client’s dealer. We provide conditions under which guaranteed VWAP contracts are optimal in this principal-agent problem. In contrast, market-on-close contracts generally cannot be optimal. These results explain the use of guaranteed VWAP contracts in practice, question the use of market-on-close contracts, and suggest considerations for the design of financial benchmarks. This paper was accepted by Haoxiang Zhu, finance.

Weighted average price management of sales under the given minimum volume of assets obligatory for realization

2021 ◽  
pp. 2150035
Author(s):  
Kirill V. Svetlov ◽  
Sergey A. Vavilov
Keyword(s):  
Market Price ◽  
Weighted Average ◽  
Minimum Volume ◽  
Average Price ◽  
Market Prices ◽  
Time Period ◽  
World Markets ◽  
Asset Trading ◽  
Model Coefficient ◽  
The Given

In this paper, we consider the construction of a sales management strategy for a highly liquid asset trading at the market. The proposed strategy goal is to maximize the weighted average price of sales. It is assumed that the market price follows a geometric Brownian motion process in which drift and volatility coefficients are random functions of time. The important feature of the given management is that the volumes of assets in the succession of buy and sell executed bargains are calculated exclusively on the basis of the observed market prices rather than on the model coefficient values. In contrast to the management proposed earlier in this study, obligatory realization of some minimum volume of assets on the given time period is demanded. Examples of real-world markets trade demonstrating the imposed constraints effect on the weighted average price values obtained within the constructed management are given.

scholarly journals Incentivizing by example and money

2020 ◽  
Author(s):  
Thomas Bauer ◽  
Franz Wirl
Keyword(s):  
Private Information ◽  
Financial Incentives ◽  
Role Models ◽  
Principal Agent ◽  
Principal Agent Problem ◽  
Reservation Utility

AbstractLeaders are role models that affect their employees’ efforts. The effect depends on how much an employee identifies with the “boss”. Since this degree of identification is private information of the employee, additional financial incentives must be provided. Therefore, we study a principal-agent problem in which the principal affects the agent’s effort by her own effort and by financial incentives. The resulting principal-agent problem has a few non-standard specifics such as: (i) bilateral externalities as the principal’s effort affects the agent and vice versa and (ii) endogenous reservation utility of the agent. Combined, this leads to non-trivial and interesting contracts.

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