The most correct method to determine the current value of future payoffs would be to:
A) take the discounted expected value at the risk-free rate.
B) take the expected value using the probabilities.
C) take the discounted expected value using the risk-neutral probabilities and the risk free rate.
D) sum the payoffs discounted at the risk free rate.
E) None of these.

Question

Quizplus · Accepted Answer

The discounted expected value using risk-neutral probabilities and the risk-free rate is the most correct method to determine the current value of future payoffs. This method takes into consideration the probabilities of different outcomes and the time value of money, while assuming a risk-neutral world where investors are indifferent to risk. This allows for the determination of a fair price for the payoff, and is commonly used in derivatives pricing.

The Most Correct Method to Determine the Current Value of Future