A man who has some money buys a goat for

A man who has some money buys a goat for

70. Then he buys it back for
71. A) How much did he make, and provide your reasoning? B) Which would have been the optimum trading strategy if he had known the movements of the goat’s market price beforehand, and how much money would he have made using this strategy?

The Correct Answer and Explanation is:

Correct Answer:

A) The man made 20 in profit.
B) The optimum trading strategy would have been to only sell the goat for 90 without buying it back, making a total profit of 90.

Detailed Reasoning and Explanation:

Part A: How much did he make?

1. Initially, the man buys the goat for 70. This means he spends 70, so his cash decreases by 70, but he owns a goat.
2. He later sells the goat for 90, meaning he gets 90 in cash and no longer has the goat.

Profit Calculation:
Total money received from selling the goat = 90
Total money spent on buying the goat = 70
Profit = 90 – 70 = 20

So, the man made a 20 profit after this series of transactions.

Part B: Optimum Trading Strategy with Foreknowledge

If the man had perfect knowledge of the goat’s market price movement, the most profitable strategy would have been different. Here’s how:

• If he knew beforehand that the goat’s price would rise to 90, the best option would have been to avoid buying the goat at 70 altogether, and instead sell a goat directly at 90, assuming access to a goat or the ability to engage in the sale.

Alternatively, considering only the given scenario where the first transaction is necessary:

• Buy the goat at 70
• Sell it at the highest price possible, which is 90
• Do not buy it back again, avoiding unnecessary future risk.

Maximum Profit:

• Sell at 90 without buying the goat back again
• Total profit = 90, assuming no ownership cost or risk.

But based strictly on the transactions mentioned:

• He bought for 70, sold for 90, made 20 profit.

Therefore, with foresight, maximum theoretical profit is 90, but in this realistic case, he made 20. The key to better trading would have been minimizing transactions and capitalizing at peak price.