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Homework answers / question archive / Analyzing a Real Life Situation using the Concept of Options Instruction: Undergrad students: Pick two scenarios, or create your own cases

Analyzing a Real Life Situation using the Concept of Options Instruction: Undergrad students: Pick two scenarios, or create your own cases

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Analyzing a Real Life Situation using the Concept of Options Instruction: Undergrad students: Pick two scenarios, or create your own cases. Graduate students: Discuss two cases with at least one from your own observations in the real world. For each case, try to answer the question involved in that case first. Then analyze that situation using the concept of options. When applicable, please identify what is the option involved, who gets the option, who offers the option, and what is the best strategy in that scenario for each party. • Option in the business world ? Warren Buffett's Cash Position: Why is Warren Buffett holding large amount of cash, instead of investing everything into equities? What is the option value of cash in investing? ? Car dealer’s trick: When negotiating the price for a car, the dealer often asks you to write your desired price down and sign your name on a piece of paper. Why? ? Airline overbooking: Airlines always sell more tickets than available seats, betting on no-shows. If too many people checked in, the airline will bid for volunteers to take the next flight. In the extreme case (such as the last flight before a storm) when no one volunteers, airline will select passengers to give up seats. ? Salary during an interview: the employer may ask your current or expected salary during an interview. Should you tell? ? Last minute deal: Holiday travel is expensive, but people can often get last-minute deals before holidays, as long as you are not picky on where to go. Why can people get good deal? ? Too big to fail: Some firms are too big to fail for a country, so the government will bail them out using taxpayer’s money. Examples are GM, AIG, and major banks during the 2008 financial crisis, or hedge funds and stock brokerage firms in the 2021 GME short squeeze. People are worried that big companies may take excessive risk. Why? • Option in daily life ? Do home improvements increase house value? Suppose there are two otherwise identical houses, except that one with a newly finished basement worth $50k and the other one's basement is unfinished. You learned that the house without finished basement has just being sold for $250k, and now the other one is asking for $300k. While you don't have to have a basement, you really like that finished basement. Do you think the $300k price is fair? ? Collecting information before asking for help: Your friend asks you if or not you have time this Saturday before asking for your help. If you say you have time, he/she then asks you if you could give a ride to Buffalo airport. If you don't have time and ask what’s up, he/she will just say "never mind". How do you feel? ? Membership vs. day pass: Monthly gym membership for one person is $50, while a one-day pass is $10. Which one is a better deal for you? Why? ? Value of expired food: When you clean up your refrigerator and pantry, do you often have to throw away lots of expired food? If so, what is the value of those wasted food items? ? Good advice vs. “Chicken soup for the soul”: Mentor A: "Do the right thing. Work hard. Be persevering. Stay focused. Stay hungry. ...". Mentor B: "You seem to be good at cooking. Find a job in the food industry then try to have your own restaurant." Which mentor do you like?

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