You Are a Hotel Manager and You Are Considering Four

question 37

Multiple Choice

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. $$\begin{array} { | l | l | l | } \hline \text { Praject } & \begin{array} { l } \text { Bamn } \\( 50 \% ) \end{array} & \begin{array} { l } \text { Recession } \\( 50 \% ) \end{array} \\\hline \text { A } & \$ 20 & - \$ 10 \\\hline \text { B } & - \$ 10 & \$ 20 \\\hline \text { C } & \$ 30 & - \$ 30 \\\hline \text { D } & \$ 50 & \$ 50 \\\hline\end{array}$$ A risk-averse manager will prefer project:

• A)A.
• B)B.
• C)C.
• D)D.

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Definitions:

Hedging

A strategy used in finance to reduce the risk of adverse price movements in an asset, typically by taking an offsetting position in a related security.

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Option Clearing Corporation

The organization responsible for ensuring the proper settlement of options contracts and mitigating counterparty risk in the options market.