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 the above.

Question

Quizplus · Accepted Answer

The discounted expected value method using risk-neutral probabilities and the risk-free rate is the most correct method for determining the current value of future payoffs in financial markets. This method takes into account the probability of different outcomes and discounts them at a risk-free rate, providing a fair value estimate that accounts for the risk inherent in the investment. Options A, B, and D do not fully account for risk and may not provide an accurate value estimate. Option E is not a valid answer.

The Most Correct Method to Determine the Current Value of Future