Find the two probabilities

Reference no: EM131167273

In the financial world, there are many types of complex instruments called derivatives that derive their value from the value of an underlying asset.

Consider the following simple derivative. A stock's current price is $80 per share. You purchase a derivative whose value to you becomes known a month from now. Specifically, let P be the price of the stock in a month.

If P is between $75 and $85, the derivative is worth nothing to you. If P is less than $75, the derivative results in a loss of 100*(75-P) dollars to you. (The factor of 100 is because many derivatives involve 100 shares.) If P is greater than $85, the derivative results in a gain of 100*(P-85) dollars to you.

Assume that the distribution of the change in the stock price from now to a month from now is normally distributed with mean $1 and standard deviation $8. Let P (big loss) be the probability that you lose at least $1000 (that is, the price falls below $65), and let P (big gain) be the probability that you gain at least $1000 (that is, the price rises above $95). Find these two probabilities. How do they compare to one another?

Reference no: EM131167273

Questions Cloud

Determine whether the given graph has an euler circuit : Determine whether the given graph has an Euler circuit. Construct such a circuit when one exists. If no Euler circuit exists, determine whether the graph has an Euler path and construct such a path if one exists.

The probability that his on base percentage will be less : What is the probability that his on-base percentage will be less than 0.360? - What is the probability that his on-base percentage will be greater than 0.370?

Find two different solutions of the puzzle : Explain why finding a path from the vertex representing (FWGC, ∅) to the vertex representing (∅, FWGC) solves the puzzle. d) Find two different solutions of the puzzle, each using seven crossings. e) Suppose that the farmer must pay a toll of one ..

What is this manufacturer fixed cost : What is this manufacturer's fixed cost? For each level of output, calculate the variable cost (VC). For each level of output except zero output, calculate the average variable cost (AVC), average total cost (ATC), and average fixed cost (AFC)

Find the two probabilities : A stock's current price is $80 per share. --- Find these two probabilities. How do they compare to one another?-

Concerned about high rates of unemployment : The government is concerned about high rates of unemployment. To spark hiring, it provides tax incentives for the businesses to invest in new capital projects and stimulate job growth. If the sole concern is adding jobs, use the Hicks-Marshall rules ..

What would be the responsibility of a frontline manager : Sam, a marketing manager, often makes ethical decisions based on what others feel about those decisions. He often considers opinions from other managers and employees. Which of the following ethical systems do Sam's decisions follow?

Other large corporations to enter our domestic market : It seems like you're hoping that MNC will help the consumers if the government focuses too much on helping businesses. I think that the United States government has enough rules and regulations for other large corporations to enter our domestic marke..

Develop your own statement about ethical responsibility : Identify and analyse an ethical issue faced by an organisation from a PR/communications perspective - Develop your own statement about ethical responsibility in PR practice as it relates to your organisation and aspects within definitions of publi..

User Account

All Pages