WELL EXLAINED ANSWERS

Question:

For the assignment, you may submit the completed MAU practice worksheetORyou may use the MAU on a decision of your choice and submit the documentation of your process.

Assignment: Multi-attribute Utility Model (MAU)

Goal

Practice using the Multi-attribute Utility Model based on a complex decision.

Overview of the Assignment

You and your significant other are making a decision about potential next steps regarding your career path. The following options have presented themselves.

Assignment Breakdown

The criteria for your job selection decision are provided in the first column below. The alternative job positions are in the first row below. The performance (how each alternative performs across each criterion) is in the table cells below. This table is objective and should contain any information related to the complexity of the problem or situation for which you are making a decision.

Performance Table

Current Job

An lateral opportunity in a newly formed group at your company's satellite office

A job at a new company

An assignment as a business officer in the Peace Corps

Salary

Current Salary

No salary increase

+25%, with stock options

Livable Wage

Workload

Current Workload

You will not manage anyone and workload will decrease a little bit

You are now managing a department of 500 people

Unknown

Commute/Location

Current commute and location.

Office is 35 minutes away, but you can work from home 3 days per week

Office is 15 minutes away

No commute, but the location is 10,000 miles from home.

Based on the criteria above, score each criterion under each option using your own personal interests, based on the following scale:

100

Best

(value?)

Better

(value?)

Mid

0

Worst

*Note: The ranges for Better and Mid will depend on your personal values and interests. For example, you may define the Better range as 70-90 or the Mid range as 10-30. It is important to define this range before you move on to the Utility Table in the next step.

Step 1

Now complete the utility table based upon your value of each of the four job positions. You must have a winner (scored 100) and a loser (scored 0) for each criterion. Once you have competed the scoring, you will assign a relative weight for each criterion string by comparing the range from worst to best. The lowest valued criterion string is weighted at 10. The next two would be rated higher than 10, respectively. Once you have completed doing this for the present state, then redo the scoring and relative weights for each of the three Futures (scenarios) listed below.

Keep in mind that the utility table is subjective. The rankings of the alternatives will be judged by your preferences.

Utility Table - One for each Future (scenario)

Relative Weight

Current Job

An lateral opportunity in a newly formed group at your company's satellite office

A job at a new company

An assignment as a business officer in the Peace Corps

Salary

Workload

Commute/Location

Total

Step 2

Let's analyze the decision further. Which option did you choose? Why? Record your thoughts below.

Scenario Questions

Using the existing performance table, answer the following questions. Note that you may need to adjust the numbers in the utility table to account for an unexpected factor. Under each scenario, explain your rationale for making each decision. How did you come to you initial decision, and how did you come to each additional scenario? Show the changes in the utility table as well.

Scenario #1:You or your spouse learn that you are expecting twins. Does this change your decision? If so, which option do you choose?

Utility Table - One for each Future (scenario)

Relative Weight

Current Job

An lateral opportunity in a newly formed group at your company's satellite office

A job at a new company

An assignment as a business officer in the Peace Corps

Salary

Workload

Commute/Location

Total

Scenario #2:Your parent has a serious, but not terminal illness that will require a long convalescence and some help from the family. Does this change your decision? If so, which option do you choose?

Utility Table - One for each Future (scenario)

Relative Weight

Current Job

An lateral opportunity in a newly formed group at your company's satellite office

A job at a new company

An assignment as a business officer in the Peace Corps

Salary

Workload

Commute/Location

Total

Scenario #3:You spouse loses his/her job. Does this change your decision? If so, which option do you choose?

Utility Table - One for each Future (scenario)

Relative Weight

Current Job

An lateral opportunity in a newly formed group at your company's satellite office

A job at a new company

An assignment as a business officer in the Peace Corps

Salary

Workload

Commute/Location

Total

20. The current price of a stock is 200, and the continuously compounded risk-free interest rate is 4%. A dividend will be paid every quarter for the next 3 years, with the first dividend occurring 3 months from now. The amount of the first dividend is 1.50, but each subsequent dividend will be 1% higher than the one previously paid. Calculate the fair price of a 3-year forward contract on this stock. (A) 200 (B) 205 (C) 210 (D) 215 (E) 220 21. A market maker in stock index forward contracts observes a 6-month forward price of 1 12 on the index. The index spot price is 110 and the continuously compounded dividend yield on the index is 2%. The continuously compounded risk-free interest rate is 5%. Describe actions the market maker could take to exploit an arbitrage opportunity and calculate the resulting profit (per index unit). Buy observed forward, sell synthetic forward, Profit = 0.34 (B) Buy observed forward, sell synthetic forward, Profit = 0.78 (C) Buy observed forward, sell synthetic forward, Profit = 1.35 (D) Sell observed forward, buy synthetic forward, Profit = 0.78 (E) Sell observed forward, buy synthetic forward, Profit = 0.34 IFM-01-18 Page 13 of 105 22. DELETED 23. DELETED 24. Determine which of the following statements is NOT a typical reason for why derivative securities are used to manage financial risk. (A) Derivatives are used as a means of hedging. (B) Derivatives are used to reduce the likelihood of bankruptcy. (C) Derivatives are used to reduce transaction costs. (D) Derivatives are used to satisfy regulatory, tax, and accounting constraints. (E) Derivatives are used as a form of insurance.17. The current price for a stock index is 1,000. The following premiums exist for various options to buy or sell the stock index six months from now: Strike Price Call Premium Put Premium 950 120.41 51.78 1,000 93.81 74.20 1,050 71.80 101.21 Strategy I is to buy the 1,050-strike call and to sell the 950-strike call. Strategy II is to buy the 1,050-strike put and to sell the 950-strike put. Strategy III is to buy the 950-strike call, sell the 1,000-strike call, sell the 950-strike put, and buy the 1,000-strike put. Assume that the price of the stock index in 6 months will be between 950 and 1,050. Determine which, if any, of the three strategies will have greater payoffs in six months for lower prices of the stock index than for relatively higher prices. None (B) I and II only (C) I and III only (D) II and III only (E) The correct answer is not given by (A), (B). (C), or (D) IFM-01-18 Page 12 of 105 18. DELETED 19. DELETED 20. The current price of a stock is 200, and the continuously compounded risk-free interest rate is 4%. A dividend will be paid every quarter for the next 3 years, with the first dividend occurring 3 months from now. The amount of the first dividend is 1.50, but each subsequent dividend will be 1% higher than the one previously paid. Calculate the fair price of a 3-year forward contract on this stock.Entrepreneur magazine ranks franchises. Among the factors that the magazine uses in its rankings are growth rate, number of locations, start-up costs, and financial stability. A recent ranking listed the top 20 U.S. franchises and the number of locations as follows: Number of U.S. Franchise Locations Franchise Hampton Inns 1.864 Jan-Pro Franchising Intl. Inc. ampm 3.183 Hardee's McDonald's 32.805 Pizza Hut Inc. 7-Eleven Inc. 37.496 Kumon Math & Reading Centers Supercuts 2.130 Dunkin' Donuts Days Inn 1.877 KFC Corp. Vanguard Cleaning Systems 2,155 Jazzercise Inc. Servpro 1.572 Anytime Fitness Subway 34,871 Matco Tools Denny's Inc. 1,668 Stratus Building Solutions These data can be found in the file Franchises. Create a PivotTable to summarize these data using classes 0-9,999, 10,000-19,999, 20,000-29,999, 30,000-39,999 to answer the following questions. (Hint: Use Number of U.S. Locations as the COLUMNS, and use Count of Number of U.S. Locations as the VALUES in the PivotTable.) a. How many franchises have between 0 and 9,999 locations? b. How many franchises have more than 30,000 locations