Eludium is currently selling for $2 a pound. At the end of the week the price wi

Question

Eludium is currently selling for $2 a pound. At the end of the week the price will either be $4 per pound (50% chance) or $1 per pound. You have $1000, and you can buy some eludium now, or you can buy at the end of the week. If you buy now, you have the option of selling at the end of the week. Explain which strategy will maximize the expected amount of money you will have at the end of the week. Explain which strategy will maximize the expected amount of eludium you will have at the end of the week.

Explanation / Answer

Expected price of Eludium at the end of the week = 4x0.5 + 1x0.5 = $2.5 a pound

a) buying 500 pound of eludium and selling at the end of the week

Expected money at the end of the week = 500x2.5 = $1250

B) Buying eludium now will be the best stratefy to maximize the amount of eludium you will have at the end of the week

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