Assignment 5_ERA

d)Now assume, instead of knowing exactly what his payoffs and liabilities are, he only knows that they’ll be lognormally distributed, with mean and sd according to the following table: Outcome Payoff Liability Rezone: Bidding war μ = $ 3 M ,σ = $ 0.6 M - Rezone: Sell to developer μ = $ 1.8 M ,σ = $ 0.36 M - Rezone: Sell w/out developer μ = $ 0.7 M ,σ = $ 0.14 M - Fail: Resell μ = $ 0.3 M ,σ = $ 0.06 M - Fail: Unsellable - μ = $ 0.1 M ,σ = $ 0.2 M Caught attempting bribery - μ = $ 1.5 M ,σ = $ 0.3 M He still knows the exact costs of purchasing the property, bribing officials, and paying the consultants’ fees. What is the probability the speculator will lose at least $200 thousand assuming he acts according to the EMV rule, as in part (a)? Answer: According to Monte Carlo simulation with 10,000 iterations. It was discovered that there are approximately 31 possibilities out of 10,000 iterations in which the investor will lose at least 200,000 USD. So, the calculated probability is P = 31/10000 = 0.0031 or 0.31%