EBK STATISTICS FOR BUSINESS & ECONOMICS
12th Edition
ISBN: 9780100460461
Author: Anderson
Publisher: YUZU
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Textbook Question
Chapter 21.3, Problem 8E
Consider a variation of the PDC decision tree shown in Figure 21.5. The company must first decide whether to undertake the market research study. If the market research study is conducted, the outcome will either be favorable (F) or unfavorable (U). Assume there are only two decision alternatives d1 and d2 and two states of nature s1 and s2. The payoff table showing profit is as follows:
| State of Nature | ||
| Decision Alternative | s1 | s2 |
| d1 | 100 | 300 |
| d2 | 400 | 200 |
- a. Show the decision tree.
- b. Use the following probabilities. What is the optimal decision strategy?
| P(F) = .56 | P(s1 | F) = .57 | P(s1 | U) = .18 | P(s1) = .40 |
| P(U) = .44 | P(s2 | F) = .43 | P(s2 | U) = .82 | P(s2) = .60 |
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We consider the one-period model studied in class as an example. Namely, we assumethat the current stock price is S0 = 10. At time T, the stock has either moved up toSt = 12 (with probability p = 0.6) or down towards St = 8 (with probability 1−p = 0.4).We consider a call option on this stock with maturity T and strike price K = 10. Theinterest rate on the money market is zero.As in class, we assume that you, as a customer, are willing to buy the call option on100 shares of stock for $120. The investor, who sold you the option, can adopt one of thefollowing strategies: Strategy 1: (seen in class) Buy 50 shares of stock and borrow $380. Strategy 2: Buy 55 shares of stock and borrow $430. Strategy 3: Buy 60 shares of stock and borrow $480. Strategy 4: Buy 40 shares of stock and borrow $280.(a) For each of strategies 2-4, describe the value of the investor’s portfolio at time 0,and at time T for each possible movement of the stock.(b) For each of strategies 2-4, does the investor have…
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Chapter 21 Solutions
EBK STATISTICS FOR BUSINESS & ECONOMICS
Ch. 21.2 - Prob. 1ECh. 21.2 - A decision maker faced with four decision...Ch. 21.2 - Hudson Corporation is considering three options...Ch. 21.2 - Myrtle Air Express decided to offer direct service...Ch. 21.2 - The distance from Potsdam to larger markets and...Ch. 21.2 - Seneca Hill Winery recently purchased land for the...Ch. 21.2 - The Lake Placid Town Council has decided to build...Ch. 21.3 - Consider a variation of the PDC decision tree...Ch. 21.3 - A real estate investor has the opportunity to...Ch. 21.3 - Dante Development Corporation is considering...
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