Financial-Market Mathematics Assignment Help

Consider the financial-market imperfection model with asymmetric information. The firm needs one unit of capital to start a project that will produce y distributed uniformly over [0, 2y]. The firm owns W<1, and needs to borrow 1-W from the bank. There are infinite number of banks providing infinite amount of capital. The risk-free interest is r. We assume p1+r. 1)

1)Suppose both the firm and the bank can observe y perfectly. Can you propose a feasible contract that makes borrowing possible?

2) Suppose the bank can only observe y with a cost C. Can you propose a feasible contract that makes borrowing possible? You can make your own assumptions on parameter values.

3) Based on your answer to 2), mark the area in a W-y diagram that represents the collection of (W, Y) value combinations with which an investment project will be funded.