The tree will have four levels (corresponding to the four months) and five nodes at each level
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Question:
The tree will have four levels (corresponding to the four months) and five nodes at each level (corresponding to the stock price ranging from 5900 to 6700 in increments of 200).
At the final level (T=3 months), we can calculate the payoff of the put option for each node using the formula:
payoff = max(K - S, 0) where:
K is the strike price (6000) S is the stock price at that node
Node 1: payoff = max(6000 - 5900, 0) = 100 Node 2: payoff = max(6000 - 6100, 0) = 0 Node 3: payoff= max(6000 - 6300, 0) = 700 Node 4: payoff = max(6000 - 6500, 0) = 1500 Node 5: payoff = max(6000 - 6700, 0) = 2700
how do we get the values for each node manually?
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
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