A speculator is considering the purchase of a commodity that he reckons has a 60% of increasing in value over the next month. If he purchases the commodity and it does increase in value, the speculator will make a profit of $200000 otherwise he will loose $60000.
a- Assuming that the expected monetary value criterion is applicable determine wether the speculator should purchase the commodity.
b- Perform a sensitivity analysis on the speculator's estimate of the probability of a price increase, and interpret the result.
c- What reservations do you have about applying the expected monetary value criterion in this context?