Following are suggested answers to the case questions, as well as pointers for classroom discussion and references to additional materials that can be used to broaden and enhance the students' experience with the case.
Under the brokerage model, the firm acts as a middleman facilitating the sale of securities. The investment bank purchases the stocks and bonds of its clients and then sells these same securities to investors. The investment bank profits for two reasons: first, it possesses specialized knowledge that allows it to locate buyers for the securities; second, due to scale economies, it is able to market securities appropriate to the portfolio requirements of investors. This model requires the investment bank to maintain a large inventory of securities, but this inventory is characterized by rapid turnover. Risk under this model stems from small profit margins and the consequent need to achieve rapid turnover.
Under the investment model, the...