Figure 4.1 -A Manager Weighs Three Options for Capacity Cushion as Depicted

question 79

Multiple Choice

Figure 4.1

-A manager weighs three options for capacity cushion as depicted in Figure 4.1. If the dollar amounts expressed in the figure are costs, what is the optimal decision?

• A) large cushion
• B) medium cushion
• C) small cushion
• D) Not enough information is given to select an option.

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Definitions:

Long Call

An options trading strategy where the investor purchases a call option with the belief that the underlying asset's price will increase.

Short Put

An options strategy where an investor sells a put option with the expectation that the market price of the underlying asset will rise.

Premium

An amount paid in excess of the nominal value or in addition to the standard cost, often associated with insurance policies or bonds.

Strip

A strategy in bond investing or a derivative trading term where a bond's interest payments and principal repayments are separated and sold as individual zero-coupon securities.