Mme. Giselle’s boutique in Cleveland, Ohio, is planning to sell Parisian frocks.
ID: 2428861 • Letter: M
Question
Mme. Giselle’s boutique in Cleveland, Ohio, is planning to sell Parisian frocks. If the public views them as the “latest fashion trend,” the frocks are worth $10,000 each. However, if the public views them as something nice but not a major fashion trend, the smocks sell for $2,000 each. If the probability that they’re viewed as a major fashion trend is 20%, what is the expected value of the frocks? What if uncertainty is nearly 80%? Now, let’s take this further. Is this a risky situation, and what can Mme. Giselle do to reduce risk? Please be specific. Show your work. I have the answer but would like some help with supporting info on this.
The expected value of the frocks= (probability of stylish* worth)+(probability of passe* worth)
=20%*10000+(1-20%)*2000
=3600
Explanation / Answer
Expected Value of Frocks=0.2(10000)+0.8(2000)=3600
Now if uncertaintiy is 0.8 then
Expected Value of frock=0.8(10000)+0.2(2000)=8400
if in case we have uncertainty of 80% then it is not riskier then former case
Mme.Giselle can enter into a contract to hedge this risk by engaging a contract with other traders have different views