Financial Risk Manager Part 1

Financial Risk Manager Part 1

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As a research analyst, you're analyzing the probability that the prices of copper will be set below 44/kgaftertheupcominggovernmentelections.Supposethatthepricesofcopperareuniformlydistributedwithafloorat44/kg after the upcoming government elections. Suppose that the prices of copper are uniformly distributed with a floor at 38/kg and a ceiling at 54/kgimposedbythegovernment,thenwhatistheprobabilitythatthepricesofcopperwillbesetbelow54/kg imposed by the government, then what is the probability that the prices of copper will be set below 44/kg?

TTanishq

Explanation:

Explanation

Since the government has set a floor of 38/kg(aorthelowerboundary)andtheceilingof38/kg (a or the lower boundary) and the ceiling of 54/kg (b or the upper boundary).

Thus, n = 54 – 38 = 16

The possible outcomes (prices) of copper that fall below 44is44 is 44 – 38=38 = 6.

Therefore, the probability that the prices of copper will be set under $44 is:

(X−a)(b−a)=(44−38)(54−38)=0.375\frac{(X - a)}{(b - a)} = \frac{(44 - 38)}{(54 - 38)} = 0.375

This calculation uses the uniform distribution probability formula where:

  • Lower bound (a) = $38/kg
  • Upper bound (b) = $54/kg
  • Target value (X) = $44/kg

The probability is calculated as the ratio of the favorable range (from 38to38 to 44) to the total range (from 38to38 to 54).

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