17. Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertainabout the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equalprobability). How much would the power plant be willing to pay today for an option to buy a ton of coal nextmonth at today's price? (Ignore discounting over the short period of a month.)а.5b.4с.3d.NOTE: I KNOW THAT THE ANSWER IS (A), BUTPLEASE INCLUDE ALL THE STEPS HOW TO SOLVETHE PROBLEM BECAUSE I NEED TO PRACTICE.THANK YOU.

Given: A risk natural plant needs = 10,000 tons The current price for the coal is = $60 The future…

Answered: 17. Suppose a risk-neutral power plant…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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3.) An investor is thinking of purchasing blue-chip stocks as part of his portfolio. At present, he is considering three blue chip stocks: Alpha, Bravo and Charlie. Based on the forecast of economists, there are three possible states of nature in the economy: growth, stagnation, recession, depression. Economists predicted that their respective probabilities are 0.25, 0.35, 0.30 and 0.10. Historical returns for the three blue chip stocks are summarized below: Stock Growth Stagnation Recession Depression Alpha 11% 3% -2% -20% Bravo 20% -1% -5% -3% Charlie 7% 2% 0% -5% (a) Determine the expected return for each stock. (b) Which stock is the riskiest using the standard deviation as a criterion? (c) Which stock is the least risky using the coefficient variation?
Olivia is a student at Boston University. She has 5 hours to study for 2 exams. The tables below show Olivia's expected scores given the amount of time she has to study. Hours Spent Studying Finance Expected Score on Finance Exam 5 4 3 2 1 0 100 96 90 B I 82 60 0 Hours Spent Studying English Expected Score on English Exam 0 1 2 3 4 5 0 40 60 72 77 80 A. Olivia spends 3 hours studying finance and 2 hours studying English. Calculate her gain from the second hour spent studying English. B. Calculate Olivia's opportunity cost of the second hour studying English. C. Assume Olivia increases the time she spends studying English. What happens to the opportunity cost of studying English? Explain. D. Assume that Olivia has the goal of maximizing her total scores on both exams (Finance plus English). How many hours should she study for each exam? E. Olivia learns that her marching band practice has been cancelled, freeing up an additional hour for studying. Given your answer to Part D, will…
4. You have just won a Casino Jackpot prize of $1,000,000 collectable in 10 yearly installments of $100,000 starting today. a) Why is this prize not really $1,000,000? b) What is it really worth today if money can be invested at 10 percent annual interest, compounded monthly?
1.5
: Suppose that Charlene has an income of $110,000 per year and that there is a 1 QUESTION in 5 (20%) chance that she will get sick in a given year. Let's suppose that the cost of the illness (in terms of lost work time and medical bills) is $80,000 which leaves her with an income of only $30,000 in that particular year. Utility UHealthy UE = UR Usick $30,000 $88,000 $94,000 $110,000 Income a) What is the actuarially fair premium for Charlene's situation? b) Continue to assume the given information. Suppose that the figure above represents Charlene's utility over various income levels. What is Charlene willing to pay for insurance? c) Continue to assume the given information. We know that Charlene would buy actuarially fair insurance but if the insurance company applied a 20% loading fee would Charlene still purchase the health insurance?
Question 3 (6.5 points): Hedge October 15th: A producer plans to sell wheat in early July; currently, July wheat futures are trading at 680'6. The expected basis is $0.60 under. July 1 • Does the producer have a long or short cash position? Does the producer have a long or short futures position? To hedge: The producer will per bushel. What is the expected cash price? (buy/sell) July wheat futures at 680'6 ⚫ The producer must (buy/sell) wheat locally in the cash market at 562'2 per bushel. To offset their future position, they must. 599'4 per bushel. • What is the actual basis? • (buy/sell) July futures at 。 Was the basis stronger, weaker, or the same as expected? What is the realized price for the producer? Method 1: 。 Method 2: 。 The hedge resulted in a realized price of
Tyler buys a futures contract from Alex that gives him the right to buy 1,000 barrels of oil at $125 per barrel in 48 months. What happens in 48 months if the actual price per barrel of oil is $100? A.) Tyler must pay Alex $25,000. B.) Tyler makes a profit of $25 per barrel, or $25,000. C.) The contract becomes void because the price turned out lower than expected. D.) Alex must give Tyler $10,000.
7
8) Draw a graph that shows the typical relationship between weighted probabilities (in prospect theory) and actual probabilities. How does this impact decision-making? 4
MCQ question Solve properly 25) Assume you pay a premium of 37 cents per bushel for a corn call with a strike price of $3.00. At the time, the futures price is $3.20. What is the option’s time value? 0 37 cents 20 cents 17 cents
1. Risk Premium: Assume your wealth is $100 and like in the Veritassium video you're offered a bet of a 50% chance of winning $10 and a 50% chance of losing $10. Assume you have square root utility. a. What is the utility you enjoy by holding the $100 of current wealth? b. What is the expected utility you foresee by entering the bet? Will you take the bet? c. What is your risk premium? Do you think someone would pay this to avoid the bet? d. Draw a diagram and label the relevant values.
1. Suppose that you are in charge of purchasing for a U.S. corporation that is planning to acquire a large number of new computers. The company's computer specialist has identified two models, one Japanese-made and one U.S.-made, that meet the necessary specifications. Since the two models are essentially equivalent, the company will buy the one with the lower price. Suppose the U.S.-made computer costs $2,400, and a similar Japanese-made computer costs 242,000 yen. If the nominal exchange rate is 110 yen per dollar, which computer is a better buy? (Hint: calculate the real exchange rate for computers)

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