shootingstar

Never be afraid to ask what you might perceive to be a stupid question. You have no idea how such queries can correct important misconceptions in the minds of fellow forum visitors.

In response to your question, when discounting most cash flows, we use (1+ r) ^T.

Only when you are working with LIBOR do you apply (1+r*T) to discount a cash flow.

In determining the bounds for options, the interest rate used to discount the exercise price is the risk-free rate. Therefore we use (1+r) ^T.

LIBOR is used as the interest rate to determine the present value of the interest savings in calculating the payoff on a forward rate agreement (FRA). In this case, we use (1+r*T)

Hope this helps.