Consider a trader who receives a bonus equal to 10% of all positive profit gener
ID: 2755935 • Letter: C
Question
Consider a trader who receives a bonus equal to 10% of all positive profit generated from trades (but is not charged a negative bonus when year-end cumulative profit is negative). Near the end of the year, at a time when he has generated $10 million in profits for his bank, the trader faces an opportunity that will generate $20 million in profits with 75% probability, but $100 million in losses with 25% probability. From the perspective of the trader, what is the expected change in his bonus from taking this opportunity?
Explanation / Answer
Profits when taking opportunity = [$20 million * 75% + (-100 million * 25%)]
= -10 milion
No bonus is charged as there is negative profit.
So, the expected change in bonus is nil.