A call option has an exercise price of $30.The stock price at a point on the binomial tree is $36.24.The calculated present value of the option at that same point is $5.86.What figure should be used to calculate option prices at points moving toward the final price?
A) $5.86
B) $6.24
C) $6.62
D) $7.01

Question

Quizplus · Accepted Answer

The figure used to calculate option prices at points moving toward the final price on a binomial tree is the price of the stock at that point. Therefore, the stock price of $36.24 should be used instead of the option value of $5.86 in order to calculate option prices at points moving toward the final price. Option values are calculated back from the final price, while stock prices are calculated forward from the current price. Option values are calculated using discounting, while stock prices are simply calculated using the up and down factors in the binomial tree.

A Call Option Has an Exercise Price of $30