What is your uncles deal worth to you

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Reference no: EM131235457

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

If you promise to go to school (which costs you a net disutility worth $10,000 today), then your even richer Uncle Vinny will buy you a Ferrari (expected to be worth $200,000), provided his business can afford it. He is an undertaker by profession, so his business will have the money if the stock market drops, but not if it increases.

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 6%. What is your uncle's deal worth to you?

Reference no: EM131235457

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