When evaluating options and trying to determine the Present Value of the Strike Price(K) -given the risk free rate(.08) and a 3 month duration are we to use?

1) K/(1.08)^.25
2) K/(1 + .08(.25))
3) Ke^-(.08*.25) - continuous compounding

NEAS please explain! The examples seem to contradict one another. I can't figure out when to use (1) vs. (2).

[NEAS: Unless told otherwise, assume annual compounding, as in #1. If the exam problem specifies continuous compounding, use #3.  If the exam problem specifies quarterly compounding, use #2.]

The question should explicitly state the type of compounding (simple, complex, or continuous - corresponding to your examples 2, 1, 3, respectively). I have found that the type of compounding is not always stated explicitly for questions in this course; however, the difference in the solutions is always much smaller than the spread in values of the multiple choice answers (i.e. it doesn't matter which form you use.)

[NEAS: Correct. For multiple choice questions, all three methods give the same solution.]