Question

1. Why do firms provide stock and stock options to non-executive employees?
Discuss empirical evidence that bears this.

2. What risks are incurred when making loans to borrowers based in foreign countries? Explain.

3. Is it better to invest in mutual funds rather than buying stocks? Explain using the concept of RISK APPETITE.

Answer 1

1. Options granted to non- executive employees affect firm performance. This method has become an important component of compensation policy in recent decades.

Non executive employees options have been referred to as " incentives that have no incentive effects" and several studies of non- executive option programs argue that pay for performance is unlikely to be the primary motivation behind these option grants.

Firms use greater stock option compensation when facing capital requirements and financing constraints results are also consistent with firms using options to attract certain types of employees provide retention incentives and create incentives to increase firm value.

2. Two risks involved in making loans to borrowers based in foreign countries are foreign exchange risk and sovereign risk.

Foreign risk is the risk that one currency will fall or rise against another. It includes inflation; the value of the funds lent to a borrower becomes worth less.Foreign exchange risk also includes interest rate parity risk.

Sovereign risk is the risk that a foreign government may delay or not allow a domestic company to pay their debts.

3. Mutual fund have the advantage of reducing the risk by diversifying a portfolio by investing in a large number of stocks.

Stock on the other hand are vulnerable to the market conditions and the performance of one stock can't compensate for the other.

The investors who has low appetite for risk, mutual fund is safe zone for them