What is uncles promise worth at market value

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Reference no: EM131235435

Although you are a millionaire, keeping all your money in the market, you have managed to secure a great deal:

If you give your even richer Uncle Vinny $20,000 today, he will help you buy a house, expected to be worth $1,000,000-if his business can afford it. He is a stockbroker by profession, so his business will have the money if the stock market increases, but not if it drops. For simplicity, assume that the stock market drops in 1 year out of every 4 years. When it does, it goes down by -10%; when it does not, it goes up by 18%. (Write it out as four separate possible state outcomes to make your life simpler.)

The risk-free rate is 5%. What is your uncle's promise worth at market value?

Reference no: EM131235435

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