In August 2017, a car dealer is trying to determine how many 2018 cars to order. Each car ordered in August 2017 costs $16,000. The demand for the dealer's 2018 models has the probability distribution shown in the table below. Each car sells for $21,000. If the demand for 2018 cars exceeds the number of cars ordered in August 2017, the dealer must reorder at a cost of $18,000 per car. Excess cars can be disposed of at $13,000 per car.
-(A) Use simulation to determine how many cars the dealer should order in August, 2017 to maximize his expected profit.
(B) For the optimal order quantity, find a 95% confidence interval for the expected profit.
(C) Why is it important to develop the confidence interval in (B)?
Definitions:
Exercise Price
The price level at which an option owner has the right to carry out a purchase (for calls) or a sale (for puts) of the asset in question.
Premium
The amount by which the price of a financial instrument or asset exceeds its face value or the cost above the normal or standard rate.
Stock Price
The cost of purchasing a share of a company in the stock market, which fluctuates based on supply and demand dynamics.
Call Option
A financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a specified price within a specific time frame.
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