Business

Lyla Atkins

17 May, 17:47

Crude oil presently sells for $2 a barrel, and you know that next week it will sell for either $1 or $4 a barrel-with these two possibilities being equally likely. You currently have $1,000 and can use any part of it to purchase oil now, and next week you can sell any part of the oil you had bought. For example, you could use $400 to purchase 200 barrels of oil today, and next week if the price is $4 a barrel, you could sell 150 barrels, and be left with 50 barrels of oil and $600 + 150 · 4 = $1, 200

Which strategy should you follow if your objective is to maximize:

a. The expected amount of money you'll possess at the end of next week.

b. The expected number of barrels you'll have at the end of next week.