You Just Won a National Sweepstakes! for Your Prize,you Opted

question 58

Multiple Choice

You just won a national sweepstakes! For your prize,you opted to receive never-ending payments.The first payment will be $12,500 and will be paid one year from today.Every year thereafter,the payments will increase by 3.5 percent annually.What is the present value of your prize at a discount rate of 8 percent?

• A)$166,666.67
• B)$248,409.19
• C)$277,777.78
• D)$291,006.12
• E)$300,000.00

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Definitions:

Put-Call Parity

A principle stating the relationship between the prices of European put and call options with the same strike price and expiration date.

Put Options

Financial contracts that give the holder the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time.

Call Options

Financial derivatives that give the buyer the right, but not the obligation, to buy a stock or other financial asset at a specified price within a specific time frame.

Strike Price

The strike price is the fixed price at which the holder of an option can buy (in the case of a call) or sell (in the case of a put) the underlying security or commodity.