A specialty hedge fund is considering the purchase of a Jackson Pollock painting. It estimates the value of the painting to be $185 million. In an auction, both the number of competing bids and the amount of the competing bids is uncertain. The hedge fund has maintained a file summarizing 10 recent art auctions that it believes are similar to the upcoming auction. It is considering a bid of $163 million and would like to evaluate its chances of winning the upcoming auction with this bid.

Question

Bid Amount (As Fraction of Estimated Share Value)
Company
1
2
3
4
5
6
7
1
0.817
0.884
0.756
?
?
?
?
2
0.771
0.863
0.825
0.819
0.851
0.786
?
3
0.804
0.851
0.786
?
?
0.851
?
4
0.880
0.756
0.874
0.877
0.910
?
?
5
0.890
0.804
0.819
0.860
0.880
0.880
?
6
0.851
0.786
0.896
0.784
0.792
0.792
?
7
0.881
0.786
0.804
0.819
?
?
?
8
0.804
0.819
0.860
0.880
0.773
?
0.824
9
0.819
0.896
0.877
0.860
0.784
0.819
0.880
10
0.756
0.804
0.786
0.786
0.819
0.885
?

a. Construct a spreadsheet simulation model to determine the likelihood of the hedge fund winning the auction. Use a discrete uniform distribution between the minimum and maximum number of bidders in the 10 observed auctions to model the number of bidders in the Jackson Pollock auction. Fit a realistic distribution to the bid data to generate values of competing bid amounts.b. For a bid amount of $163 million, estimate the probability of the hedge fund winning the auction?

What will be an ideal response?

Answer 1