A Cell Phone Company Offers a Simple Extended Warranty Plan

question 29

Essay

A cell phone company offers a simple extended warranty plan. If your phone is damaged, they will repair it for up to $50. If you lose or destroy your phone, they will give you a $200 voucher towards a new phone. The company believes that 5% of customers will need the replacement voucher and 10% will request a repair.
-What are the mean and standard deviation for the profit on a 1000 plans?

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Definitions:

Security Prices

The cost at which a particular financial security, such as stocks or bonds, is bought or sold in the market.

Intrinsic Value

The actual, fundamental worth of an asset, investment, or company, often calculated using financial analysis and excluding market price fluctuations.

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy an asset at a specified price within a specific time period.

Time Premium

The portion of an option's price that exceeds its intrinsic value, representing the value placed on the remaining time until expiration.