Reference no: EM131757676

Question: Minying has just bought a single share of stock from DA Corporation for $50, and she is considering buying a put option for the stock, which would cost her an additional $10. A put option would allow her to sell the stock one year from now at the current price of $50. If she does not buy the option, then she would sell the share one year from now at its market price. Minying believes that the price of the share will go up to $ 100 with a probability of 0.6 and go down to $30 with a probability of 0.4. Minying follows the five Rules of Actional Thought and prefers more money to less. She follows the delta property for prospects up to $200, and she is indifferent between receiving $30 for sure and a deal with a .6 chance of getting $50 and a .4 chance of getting $10.

What should Minying do? (Do not worry about discounting for time.)

a. Not buy the option, which means that she will sell it in one year at market price.

b. Buy the option and use the option only if the market price goes up to $100.

c. Buy the option and use the option only if the market price goes down to $30.

d. Buy the option and use it in either case.