WANT TO EARN $5MM A YEAR DOING NOTHING?
9 April 2009 by Cullen Roche
5 Comments
Just answer these Larry Summers hedge fund interview questions:
1. Ten people are bidding on a stock at 90, while 100 people are offering to sell it at 91. What price is the next trade?
2. There’s a dollar on the table. I’m going to flip a coin. If it comes up heads, I’ll double the money. If it comes up heads again, I’ll double it again. Whenever it comes up tails, we stop.
But there’s a catch: You have to pay a fee to play. How much are you willing to pay?
3. x = the economy
x + y = the economy not all screwed up
Find y.
Can you go 3 for 3?
1) Unknown.; someone has to take the bid or the offer before it will transact.
2) You did not say you would give me the money so $0; If I get to keep the money on the table, the fee I am willing to pay depends upon the slope of my utility function and subsequent certainty equivalence.
3) Transparent accountability.
1. Depends on the willingness of the buyers and sellers. Who is more needy?
2. $2. Otherwise I have better odds at a roulette wheel and I get free drinks.
3. bondholders taking their own losses.
1. There won't be a next trade unless one of them relents and either sells at 90 or buys at 91.
2. I'm willing to pay 1 dollar (the dollar on the table not from my own pocket).
3. y=sanity
1. Just like houses on the way up, it "worth" what somebody will pay –10 of the sellers might get $90. The other 90 will get some unknown value below $90.
2. In the real world, you might reasonably pay 49 cents on the dollar & make a profit over time. If I'm doing the math right, in Tim Geithner's world, you can pay 99 cents but you only have to kick in ~7 cents of your own money. (Assuming you have at least $100B to buy a seat at the table, Timmy kick ins another ~7 cents & then loans you 85 cents.)
3. economy minus economy not all screwed up = Y, aka "the output gap"
3) Y=the abolishment of the Fed