Financial contracts often specify reference prices whose values are undetermined at the time of contracting. Consequently, a broker may trade in a way that influences these reference prices to his advantage, but to the detriment of the client, as recent manipulation scandals showed. To study such situations, we introduce a stylized model of financial contracting between a client, who wishes to trade a large position, and her broker. We find that a contract based on the market volume-weighted average price (VWAP) emerges as the unique optimal solution to this principal-agent problem. This result explains the popularity of guaranteed VWAP contracts in practice and also suggests considerations for the optimal design of financial benchmarks. The talk is based on joint work with Markus Baldauf (University of British Columbia) and Joshua Mollner (Northwestern University).

Christoph Frei is an associate professor of mathematical finance at the University of Alberta. He received his PhD degree at ETH Zurich and was a postdoctoral researcher at École Polytechnique in Paris. His research is of both theoretical and applied nature, which is also reflected in several ongoing collaborations with the financial industry in the areas of machine learning and risk management. His current research is in mathematical finance (algorithmic trading and credit risk management) as well as mathematical economics (over-the-counter markets and the economics of digital currencies).