Reference no: EM131754953

Question: RegionBank, a commercial real estate lender, has fallen on financial difficulty and a government takeover is a possibility. Pierre, the CEO of CashDollarCo, one of RegionBank's minor creditors, is working on a strategy for restructuring its portion of RegionBank's debt. Pierre presents his board with four alternatives that are detailed in the graph given here. CashDollarCo is risk-neutral in the range between -$200 Million and $400 Million.

How many of the following statements are true?

1. Whether Pierre should choose Alternative 4 is insensitive to the value ofv that he assigns.

II. If v = 0.2 and one ofRegionBank's major creditors were to offer Pierre $50 M to choose Alternative 3, he should refuse.

III. If Pierre were to gain (perfect) insider knowledge that the government was planning a takeover, he would choose Alternative 2.

IV. The value of clairvoyance on a government takeover is greatest when x = 0.5.

V. If v = 0.4, the value of clairvoyance on a government takeover is less than $50 M.

VI. If v = 0.4, Pierre should purchase a $10 M symmetric detector that predicted a government takeover with accuracy 0.75 if it is his best offer for new information.

VII. If v = 0.4 and Pierre knew of a detector with specificity 0.75, he should pay nothing for that detector if its sensitivity were below 0.45.

a. 0 or 4

b. 1 or 5

c. 2 or 6

d. 3 or 7