SCENARIO: PAYOFF MATRIX FOR AIRBUS AND BOEING

question 104

Multiple Choice

SCENARIO: PAYOFF MATRIX FOR AIRBUS AND BOEING
The payoff matrix supplied shows outcomes of various strategies
That Airbus and Boeing might follow in response to action on the
Part of the other company.This payoff matrix describes actions
In developing so­called super­jumbo jets that can carry 600 or
More passengers.In each element, the lower­left value gives
The outcome for Boeing based on the action of Airbus and the
Upper­right value gives the outcome for Airbus based on the
Action of Boeing.For example, in element A, each company will
Lose $10 million if they both decide to produce super­jumbo jets.
(Scenario: Payoff Matrix for Airbus and Boeing) Boeing has
Decided not to produce super­jumbo jets.Instead, it will
Continue to market its 450­passenger 747s.However, Airbus will
Produce super­jumbo jets.Is Boeing's decision correct?

• A)Yes; because it would lose profits if it produced a super­ jumbo jet.
• B)No; because it could earn more profits by not producing a super­jumbo jet.
• C)Yes; because it would neither lose nor earn more profits by producing a super­jumbo jet.
• D)No; because it would lose more profits if it produced a super­ jumbo jet.

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Definitions:

Firm Value

The total value of a business, determined by its assets, earnings, and potential in the market.

Call Option Price

The price at which the holder of a call option has the right, but not the obligation, to buy an underlying security before the option expires.

Option Maturity

The date on which an option contract expires, after which it can no longer be exercised.

Lower Bound

The minimum value that a financial instrument, such as an option, can decrease to, taking into account current market conditions.